MEETING STATE OF CALIFORNIA PUBLIC EMPLOYEES' … · 8/20/2019 · Creation”, Hiromichi Mizuno,...

MEETING

STATE OF CALIFORNIA

PUBLIC EMPLOYEES' RETIREMENT SYSTEM

BOARD OF ADMINISTRATION

INVESTMENT COMMITTEE

OPEN SESSION

ROBERT F. CARLSON AUDITORIUM

LINCOLN PLAZA NORTH

400 P STREET

SACRAMENTO, CALIFORNIA

TUESDAY, AUGUST 20, 2019

8:34 A.M.

JAMES F. PETERS, CSRCERTIFIED SHORTHAND REPORTER LICENSE NUMBER 10063

J&K COURT REPORTING, LLC 916.476.3171

A P P E A R A N C E S

COMMITTEE MEMBERS:

Mr. Rob Feckner, Chairperson

Ms. Theresa Taylor, Vice Chairperson

Ms. Margaret Brown

Mr. Henry Jones

Ms. Fiona Ma, represented by Mr. Matthew Saha

Ms. Lisa Middleton

Mr. David Miller

Ms. Stacie Olivares

Ms. Eraina Ortega

Ms. Mona Pasquil Rogers

Mr. Jason Perez

Mr. Ramon Rubalcava

Ms. Betty Yee

STAFF:

Ms. Marcie Frost, Chief Executive Officer

Mr. Matt Jacobs, General Counsel

Dr. Yu (Ben) Meng, Chief Investment Officer

Mr. Dan Bienvenue, Interim Chief Operating Investment Officer

Ms. Caitlin Jensen, Committee Secretary

Ms. Anne Simpson, Investment Director


A P P E A R A N C E S C O N T I N U E D

ALSO PRESENT:

Mr. Dave Elder

Mr. John Griswold, Chartered Financial Analysts Institute

Mr. Hiromichi Mizuno, Government Pension Investment Fund, Japan


I N D E X PAGE

1. Call to Order and Roll Call 1

2. Approval of the August 20, 2019 Investment Committee Education Workshop Timed Agenda 2

3. Investment Education Workshop #3 a. Guest Keynote: “The GPIF Endeavor as a

Cross-Generation, Universal Investor: Aligning Interests for Long-Term Value Creation”, Hiromichi Mizuno, Executive Managing Director, Chief Investment Officer, Government Pension Investment Fund, Japan 2

b. Public Markets Part Two: Global Equity – Anne Simpson, John Griswold, Chartered Financial Analysts Institute 88

4. Public Comment 152

Adjournment 155

Reporter's Certificate 156


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P R O C E E D I N G S

CHAIRPERSON FECKNER: If we could all please take

our seats, we'd like to call the workshop to order.

First order of business will be to call the roll.

COMMITTEE SECRETARY JENSEN: Rob Feckner?

CHAIRPERSON FECKNER: Good morning.

COMMITTEE SECRETARY JENSEN: Theresa Taylor?

VICE CHAIRPERSON TAYLOR: Here.

COMMITTEE SECRETARY JENSEN: Margaret Brown?

COMMITTEE MEMBER BROWN: Present.

COMMITTEE SECRETARY JENSEN: Henry Jones?

COMMITTEE MEMBER JONES: Here.

COMMITTEE SECRETARY JENSEN: Fiona Ma represented

by Matt Saha?

ACTING COMMITTEE MEMBER SAHA: Here.

COMMITTEE SECRETARY JENSEN: Lisa Middleton?

COMMITTEE MEMBER MIDDLETON: Present.

COMMITTEE SECRETARY JENSEN: David Miller?

COMMITTEE MEMBER MILLER: Here.

COMMITTEE SECRETARY JENSEN: Stacie Olivares?

COMMITTEE MEMBER OLIVARES: Here.

COMMITTEE SECRETARY JENSEN: Eraina Ortega?

COMMITTEE MEMBER ORTEGA: Here.

COMMITTEE SECRETARY JENSEN: Jason Perez?

COMMITTEE MEMBER PEREZ: Here.


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COMMITTEE SECRETARY JENSEN: Mona Pasquil Rogers?

COMMITTEE MEMBER PASQUIL ROGERS: Here.

COMMITTEE SECRETARY JENSEN: Ramon Rubalcava?

COMMITTEE MEMBER RUBALCAVA: Here.

COMMITTEE SECRETARY JENSEN: Betty Yee?

COMMITTEE MEMBER YEE: Here.

CHAIRPERSON FECKNER: Thank you.

The next order of business will be to approve the

Committee timed agenda. What's the pleasure of the

Committee?

VICE CHAIRPERSON TAYLOR: Move approval.

COMMITTEE MEMBER MILLER: Second.

CHAIRPERSON FECKNER: Moved by Taylor, seconded

by Miller.

Any discussion on the motion?

Seeing none.

All in favor say aye?

(Ayes.)

CHAIRPERSON FECKNER: Opposed, no?

Motion carries. Thank you.

Item 3, the Investment Education Workshop.

Mr. Meng.

(Thereupon an overhead presentation was

presented as follows.)

CHIEF INVESTMENT OFFICER MENG: Thank you, Mr.


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Chair. Good morning, members of the Investment Committee.

So today, we continue with our Board education workshop.

And we are actually honored to have two distinguished

guest speakers with us today.

So first, we have -- I will introduce the first

speaker and then my colleague Dan Bienvenue will introduce

the second speaker.

So the first guest speaker we have is Mr. Hiro

Mizuno, the Chief Managing Director and Chief Investment

Officer of Japan -- the Government Pension Investment Fund

of Japan, the GPIF, the largest pension fund in the world

and one of the largest pool of assets in the world.

You have his bio in front of you. And I was

trying -- I was hoping to find an abridged version of his

bio on Google. And that was a mistake last night.

(Laughter.)

CHIEF INVESTMENT OFFICER MENG: It goes on pages

after pages. It's sufficient to say that, you know, Mr.

Mizuno joined GPIF in January 2015. And since then he has

served as the Executive Managing Director and Chief

Investment Officer. And prior to joining GPIF he was a

partner of Coller Capital, a London-based private equity

firm.

Later you will see that in his presentation, his

experience working as a GP in the private equity industry


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has really benefited him and the GPIF in terms of

designing their program. And also as you will learn later

that GPIF managed almost all, if not all, the assets by

external managers.

So the relationship between GPIF and the GP

communities is of more critical importance to them. In

contrast, we manage about 80 percent asset in-house, but

still we have 20 percent asset manage externally so we can

really learn a lot from Hiro's creative thinking in terms

of designing long-term alignment in terms of economic

interest with the GPs, and also in terms of applying ESG

principles. And in the time horizon how to become a

long-term investor when we engage external partners.

Before he joined the private equity firm, he

worked at Sumitomo Trust Bank in Japan, Silicon Valley,

and in New York. He's also a member of the Board and

Asset Owner Advisory Committee of PRI, co-chair of the

Milken Institute of Global Capital Markets Advisory

Council. He's also the founding member of Climate Finance

Leadership Initiative, the Global Investors for

Sustainable Development, Alliance Member, and Global

Business Coalition for Education Advisory Board Member,

and also Asia Advisory Group Member of Climate Action

100+.

And as you see that these are the activities at


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CalPERS. We have been actively engaging, and Hiro and

GPIF has been a great partner with us on these important

global initiatives. So for that, we want to thank him and

GPIF for their great partnership working with us.

I could go on. You know there's a long list of

his -- also participation with Japanese government at

different levels, and also his involvement with the

academic community. So it's suffice to say that his -- in

addition to be one of the global leader, as a

practitioner, he's also a global leader in academic, the

thought leader as well.

So without further ado, I will turn over to Mr.

Mizuno who will share with us on how to design a long-term

relationship with GPs to align with the economic terms and

our value.

So with that, please put a round of applause

together.

(Applause.)

MR. MIZUNO: Good morning ladies and gentlemen.

And it's my real privilege to be able to present GPIF and

our strategy to world famous CalPERS Board. I cannot -- I

cannot help calling you judges, because you are appear to

be like judges to me. So it's a bit intimidating, but I

try not to be intimidated and try to be open to share with

you what we are trying to achieve at GPIF. And also as


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Ben mentioned, we regard CalPERS as our most important

strategic partner. And we also think we are most alike

with each other, because they are -- when we talk about

the business model of the public pension fund global asset

owners, a lot of people try to compare GPIF with the other

CPPIB, Canadian, or like Norges and some Scandinavians.

But they're working in very different regulatory framework

or environment.

So I always feel like CalPERS -- and also the --

I saw the other -- my friend from CalSTRS in the audience,

but we -- I always feel like CalPERS and CalSTRS are our

closest allies in terms of the environment we operating,

and the -- sort of the significance in their and our

capital markets. So I, first of all, want to express my

gratitude for a continuous relationship and a partnership

between GPIF and CalPERS.

So today, I really don't know exactly what

interest the Board -- the CalPERS Board about what we have

been doing. So let me start with the introduction of GPIF

to you, who we are and how we operate. And I think there

maybe interest -- is of interest of CalPERS Board how the

Board should or would work with the investment team to

optimize our performance.

--o0o--

MR. MIZUNO: So let me start with a quick


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snapshot of us. We at the moment managing the 1.5 or 1.6

trillion U.S. dollar - we're also public - pension reserve

fund. And our performance since we started our market

investment has been like annualized return 3 percent. And

we made, you know, roughly 621 billion U.S. dollar gain

since we started.

And as you see the graph accumulating --

accumulated the gain, you can see there's a huge pick up

over the last five years, which is because we changed our

policy asset mix when I arrived at GPIF from 75 percent in

the fixed income, and mostly in Japanese government bond,

to 50 percent in global equities and 50 percent in global

fixed income.

And we got approval to invest into the

alternative assets up to 5 percent when we revised the

policy asset mix. But unfortunately, at the moment, we

are still -- have only less than 1 percent exposure to

alternative asset classes. And I was actually on the

other side when the GPIF decided and approved the -- our

current policy asset mix.

And there's a big argument that the GPIF should

have like a 20 percent exposure to private equity and real

assets. And, you know, I spent 20 years of my

professional career managing private equity. And before I

was called back by Prime Minister to run this fund, I was


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a partner of the -- one of the private equity funds which

CalPERS used to maybe still invest in. And then I knew

how difficult to deploy a huge amount of money in a

private market. That's why we agreed to have a -- not

even have a 5 percent allocation, but a 5 percent cap.

And at the moment, we haven't even reached 1

percent, which is -- for us is not a small amount of

money.

--o0o--

MR. MIZUNO: So this has been what we have been

operating. And as I just described, our policy asset mix

now 50 percent in global equity, and 50 percent in global

fixed income, and 35 percent we have to invest in Japanese

domestic bond, which is mostly Japanese government bonds.

--o0o--

MR. MIZUNO: And given this allocation and the --

our fund size, we usually say we own about 8 percent to 10

percent of Japanese listed companies, and we own about 1

percent of the major U.S. companies. So our exposure to

U.S. economy is quite significant.

And in this context, I think CalPERS and GPIF are

one of the biggest owner of the U.S. public equities,

meaning we are owner of the U.S. economy. So it's very

important for us that the U.S. economy continue to have

the healthy growth. And I'm going to talk about it later,


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but our universal ownership approach meaning we are the

biggest beneficiary of economic growth or healthy

commercial activities. So that's why we need to

contribute to make the whole system more sustainable.

And that's the concept that came from this asset

allocation, which we ended up owning whole capital market.

--o0o--

MR. MIZUNO: So just to give you a snapshot of

who we are from different angle. We are the manager of

the Japanese Public Pension Reserve Fund. Why we need a

reserve? Japanese pension scheme -- public pension scheme

that's actually -- actually designed as a pay-as-you-go

scheme. But the problem is for the pay-as-you-go scheme

pension scheme to be sustainable, we need to have younger

generation to support retirees. But as you know, Japan is

going through the huge aging, you know, transformation.

And for the next, you know, 100 years, we're probably

going to suffer from the other reverse age pyramid.

So we don't have enough young people to support

the pay as you go system. So, you know, 15 years ago, I

guess, like Japanese government came up with a very

audacious experimental, the idea of, you know, the hybrid

mechanism, which is -- basically is pay-as-you-go system.

But for the next 100 years, until the age pyramid

go back to normal, they make the best use of the fund, all


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of the -- you know, the saved or contributed from the

other -- the previous generation. So that's the fund GPIF

is managing. So always make a return from this reserved

fund to fill the gap, so that the -- our younger

generation is not going to suffer from too much burden to

support the older generation.

--o0o--

MR. MIZUNO: So this is actually the graph trying

to illustrate how important GPIF fund is. You can say

that it's not as important or it's still very important.

For the next 100 years, this -- the chart describes the --

how much money the public pension scheme have to pay out

to retirees. And GPIF's fund is going to account -- be

responsible about 10 percent of future liability of

Japanese public pension scheme.

As you can imagine from our -- you know, the

aging society, even last year, our public pension scheme

paid out about $600 billion. And we are still at the

entrance of aging society. So you can see the magnitude

of the problem caused by aging society. And so the GPIF

is meant to, you know, bridge the gap, so pay out the

other 10 percent of the future liability. And we are

designed to disappear in 100 year's time.

--o0o--

MR. MIZUNO: So coming to back to the -- our


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governance structure, which I think may be interesting to

the CalPERS Board. GPIF is under supervision of Ministry

of Health Care, Labour and Welfare. Because historically,

the pension was regarded as the labor welfare. So we are

under supervision of Ministry of Health Care and Labour --

Labour and Welfare.

And we have a board of governors, which consists

of 10 representatives, and which all appointed by the

Minister of that -- the Ministry. And now we have 10

members. And today, I was impressed to see like, you

know, gender diversity on the CalPERS Board. We only have

the 20 percent of the female represented out of 10. But

the -- naturally, women tend to live longer in Japan, so

there probably is some time that we will lose one men

representative, so...

(Laughter.)

MR. MIZUNO: But I think that the -- we are the

supporting member of the Thirty Percent Coalition. I feel

embarrassed every time we have only -- like I tell them,

we have only 20 percent female representative on our

board. But we have a board of governors, who make all the

strategic and high level decisions, namely, policy asset

mix. And we also need to get their approval when we start

new investment style or new invest -- new asset class.

And we have a clear, you know, separation of governance of


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execution. And I'm Executive Managing Director and the

CIO responsible for the Investment Office.

And then we started this new governance structure

about two years ago. Before, there's a huge criticism,

like, you know, the GPIF is operating under political

pressure, which was not really the case, because I never

felt political pressure when I make an investment

decision.

But there's a perception among Japanese -- the

public that, you know, the GPIF is under political

pressure to make some particular investment. So because

of those concerned, the Government came up with a new

governance structure, which was put in place about two

years ago and we are operating in that -- the governance

framework.

I'd like to talk about the philosophy and, you

know, strategy how to promote the long-termism. But I'm

happy to take questions, if you want to ask me about our

governance structure or, you know, about the GPIF, so that

you'd probably be able to understand the -- my you, you

know, remaining presentation better.

CHAIRPERSON FECKNER: Very good. Thank you.

Ms. Taylor.

VICE CHAIRPERSON TAYLOR: Thank you. See, I told

you, we ask questions.


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I was curious you said the -- you had some

political pressure, the government --

MR. MIZUNO: No, I didn't.

VICE CHAIRPERSON TAYLOR: Not you, but I mean,

the pension system. What was the structure as opposed to

the new structure that was put in place?

MR. MIZUNO: Well, we used to have the -- what

they called Investment Advisory Committee as the other --

the counsel to GPIF.

VICE CHAIRPERSON TAYLOR: Okay.

MR. MIZUNO: The other Board of Governors meant

to divide us from the political leadership.

VICE CHAIRPERSON TAYLOR: Oh, I see. Okay.

MR. MIZUNO: That's the whole purpose of this,

the new governance structure, so --


MR. MIZUNO: And I forgot to mention, but the ten

representatives, two came from like, you know, finance or

investment professional or academics, and two from the --

two are former central bankers, and one representing the

other business federation, or like a Chamber of Commerce

kind of things, and the one representing biggest labor

union, and one representing -- I mean, one is a lawyer,

the other is a CPA. So that's the sort of composition of

our Board of Governors.


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VICE CHAIRPERSON TAYLOR: And they're all

appointed?

MR. MIZUNO: They are all appointed by Minister.

VICE CHAIRPERSON TAYLOR: By the Minister.

MR. MIZUNO: Yeah.

VICE CHAIRPERSON TAYLOR: Okay. And then I

was -- what I'm seeing here is it looks like you -- what's

your rate of return, is that the 3.3 percent?

VICE CHAIRPERSON TAYLOR: Yeah. Well, we are

required to make 1.7 percent plus real wage increase with

minimal risk. And I really don't think that's the best

way to describe -- that is the best instruction to give to

the investment team, but that's what the -- we are

operating with.

So if we make the 1.7 percent over real wage

increase, that should satisfy that 10 percent, you know,

the responsible, you know, the 10 percent of the benefits.

VICE CHAIRPERSON TAYLOR: The reserve fund that

you're talking about, that's what --

MR. MIZUNO Hmm?

VICE CHAIRPERSON TAYLOR: You're saying that

should satisfy the reserve fund?

MR. MIZUNO: Yeah, that's right.

VICE CHAIRPERSON TAYLOR: Okay. So you guys are

fully funded, is that what I'm assuming?


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MR. MIZUNO: Yeah. Well, it's tricky to say

fully funded, because it's a pay-as-you-go scheme.

VICE CHAIRPERSON TAYLOR: Right.

MR. MIZUNO: And as you see, the -- this graph --

you know, this government contribution is -- basically,

it's a tax. So it's very difficult to describe whether we

are fully funded or not, because the -- that actually take

it into account, they will get a subsidy from the tax --

you know, the account. And then also the other annual

pension premium paid by the other working generation, and

then reserve fund.

VICE CHAIRPERSON TAYLOR: And we have -- and you

have that discrepancy now between aging population and a

much smaller population contributing into the fund.

That's what I was curious about, because it

sounds to me like we have a similar -- kind of similar

situation with our aging population. We don't have a

pay-as-you-go scheme necessarily, because we have to hit a

certain rate of return to make sure, and be fully funded

to make sure that we pay our benefits.

MR. MIZUNO: Yeah, I think the -- I think the --

for the next 25 years, we have net inflow of the capital.

And after that, we will be getting to the real serious

like distribution more. And so I think that compared to

Ben, one of very few privileges I have is I probably don't


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need to worry about the payout for the next 25 years, so

we can just focus on more long-term investment.

CHIEF INVESTMENT OFFICER MENG: Yeah. So as Hiro

said, there are a few key differences between us and GPIF.

One is the current liability, as Hiro just said, at least

for the next 25 years, they don't have projected current

liability payout. Currently, we pay out more than $20

billion a year.

And the other thing that as Hiro just mentioned,

GPIF is designed to go away in 100 years. So there's a

termination date. CalPERS, our fund, we don't have a

termination date. It's a perpetual. Supposed to be a

perpetual fund. So these are the key differences.

And also, as you point out, our required rate of

return is 7. It's much higher than their required rate of

return. But that difference aside, there's still a lot of

things we can learn and benefit from there.

VICE CHAIRPERSON TAYLOR: Oh, yeah. Yeah. I'm

just trying act -- trying to help -- figure out the

similarities, as well as I didn't realize -- I think I

took it differently when you said there was 100-year date.

So why would the pension system go away in 100 years.

Have you guys --

MR. MIZUNO: No, the GPIF will go away, but the

pension scheme will continue obviously.


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CHIEF INVESTMENT OFFICER MENG: So the whole --

MR. MIZUNO: You know, the other -- now, we have

the age pyramid, which is almost like a pillar.

VICE CHAIRPERSON TAYLOR: Oh, yeah.

MR. MIZUNO: And then going into the other

eight -- the reverse age pyramid. And that then those

generations will die and it go back into normal pyramid,

right?


MR. MIZUNO: The Japanese government project

it -- that transformation will take another probably next

100 years. And during that period, the burden on the

younger generation is going to be unbearably heavy.


MR. MIZUNO: So that's why they came up is the

idea of the other -- using this reserve fund, which I'm

managing to fill the gap --

VICE CHAIRPERSON TAYLOR: Got it.

MR. MIZUNO: -- so that the other younger

generation wouldn't suffer outrageously the other pension

burden to pay to the retired people.


CHIEF INVESTMENT OFFICER MENG: So basically the

hope is that within 100 years, Japan will be able to

reverse the aging trend.


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VICE CHAIRPERSON TAYLOR: Right. Right. Okay.

MR. MIZUNO: Yeah. That's a bold assumption of

them.

(Laughter.)

VICE CHAIRPERSON TAYLOR: Let's hope so.

MR. MIZUNO: I hope so, too.

VICE CHAIRPERSON TAYLOR: Thank you.


Ms. Yee.

COMMITTEE MEMBER YEE: Thank you, Mr. Chairman.

And welcome, Hiro. It's really wonderful that

you're here. I had a question. Since you're a national

fund and you talked a little bit earlier in your

introductory remarks about our -- the differences in our

regulatory framework. So who regulates you?

MR. MIZUNO: The Ministry of Health, Labour, and

Welfare.

COMMITTEE MEMBER YEE: Okay. And so -- and part

of why I'm asking is that I know you really did some great

work in terms of corporate governance improvements and

reforms. And so are those policies advisory that come

down from the government of Japan or are you self

regulating? I'm just trying to get a sense of where

those -- how you treat advice and mandates?

MR. MIZUNO: Yeah. Well, that's the -- that's a


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very good question, Betty. And I try to answer the

question as effectively as possible.

When -- let's take the ESG as an example.

COMMITTEE MEMBER YEE: Yeah.

MR. MIZUNO: Four years ago, we started a

campaign to integrate ESG into our investment strategy.

And we started calling for the corporates to align their

business with the -- all those ESG requirements. At that

time, we received the criticism from some media, like I'm

under pressure by the Abe administration, if we are trying

to promote the corporate governance reform, and that's why

I'm doing it.

And I keep refusing that argument, saying like,

you know, I think taking ESG into the investment analysis

make 100 percent financial sense and nothing to do with

the Abe administration want to promote the corporate

governance reform.

But, you know, that's the kind of the general

perception which we struggle with. So to address that

kind of misperception, government came up with that

governance structure trying to make us look like as

distant as possible from the other -- the policymakers.

But in reality, I never brought the policy agenda

into my investment decision whatsoever. And ESG

integration, ESG campaign for me, it just really makes


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sense for -- as a universal owner to protect our fund from

the capital market volatility, or like a system risk, we

are facing like climate change.


MR. MIZUNO: I think the story -- I couldn't

sharply answer your question, but the -- it's nothing to

do with the other Abe administration's policy that GPIF

promote corporate governance reform of Japanese

corporates.

COMMITTEE MEMBER YEE: Okay. Yeah, that's a good

example.

And then with respect to your assets, how much of

it is internally and externally managed?

MR. MIZUNO: We are regulated not to take any

equity investment in-house. So the 100 percent of equity

portfolio is managed by external money managers. And for

the fixed income, we actually can manage all the fixed

income in-house. But as -- we made a strategic decision

to only manage domestic fixed income in-house. So 100

percent of the fixed income and 100 percent of global

equity portfolio are managed by our external managers.

COMMITTEE MEMBER YEE: Okay. All right. Thank

you.

MR. MIZUNO: Okay.



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Mr. Perez.

COMMITTEE MEMBER PEREZ: Mr. Mizuno, thank you

for coming.

On one of your slides, I show three tiers for

employees. Can you walk me through, please --

MR. MIZUNO: This one?

COMMITTEE MEMBER PEREZ: Yes, sir.

So if I'm a new employee, where does --

MR. MIZUNO: Okay. We are like the U.S.

Social -- you know, Social Security. So it's a national

pension, whether they are student, or whether they are

working for the company, or they are self-employed, or

they are -- they make -- you, know they are homemakers,

regardless of their -- you know, their jobs, they are part

of this national pension scheme. So literally every

single Japanese are beneficiaries for this national

pension scheme.

And on the top of national pension scheme, we

have employee's pension, but this is mandatory. And GPIF

manage the fund contributed by those national pension, as

well as the mandatory employee's pension or corporate

pension. And the big corporates, like Toyota and Nissan,

those guys, they have their own -- the pension on the top.

So they're -- that third layer is up to the person or the

company you work for.


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So not everybody has the luxury of having that

start -- that layer. But every single Japanese has the

other -- the first tier -- or first layer. And the people

who work for the corporates also entitled for the

mandatory. That's the second tier pension scheme.

COMMITTEE MEMBER PEREZ: And the national

pension, that's the tax you referred to?

MR. MIZUNO: Hmm?

COMMITTEE MEMBER PEREZ: The national pension for

everybody, the basic -- the basic pension --

MR. MIZUNO: Yeah, this is basic pension. This

is Social Security.

COMMITTEE MEMBER PEREZ: The tax you referred to

earlier?

MR. MIZUNO: Attach?

COMMITTEE MEMBER PEREZ: The tax.

MR. MIZUNO: Well, this is not tax, but they are

collected together with tax. So, you know, those -- like

that graph I showed that the subsidy came from -- the

government came from the general tax account. And the

middle layer, it was like directly contributed by the

other taxpayers, but it's collected together with tax. So

a lot of Japanese people think that the pension

contributions is also money like a tax. Yeah.

COMMITTEE MEMBER PEREZ: And the employee's


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pension, is that the employee paid or is that --

MR. MIZUNO: It's half-half. Yeah. So the

other -- basically, the corporate have to match the

contribution but their employees.

COMMITTEE MEMBER PEREZ: Thank you.

And then what's your staff size and your

operating budget?

MR. MIZUNO: That's a good question. We have

only 135 people working. We don't have the administration

side of CalPERS. So basically it's Investment Office we

have 135. And our cost of operation is very low, but we

paid about $500 million to the asset manager to manage our

portfolios. So it's just -- you know, it's just a

strategic decision and also regulatory preference for GPIF

not to manage the equity in house. Because if you think

about it, we own about 10 percent of Japanese corporates.

And now our relationship with the Japanese corporate

community is very, very, very positive.

But four years ago, when I was called by, you

know, Japanese government to leave London private equity

shop to run this fund, Japanese corporate was very

skept -- very concerned about GPIF becomes like, you know,

the private equity fund manager.

So the regulator made it clear GPIF is not going

to manage the equity portfolio themselves. So that we're


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not going to be sort of like a dominant shareholder in a

Japanese -- in the public -- private sector. So that's a

background why we don't take any investment in-house.

COMMITTEE MEMBER PEREZ: Thank you very much.

MR. MIZUNO: Thank you.


Mr. Jones.

COMMITTEE MEMBER JONES: Yeah. Thank you, Mr.

Chair. Good to see you again, Hiro.

MR. MIZUNO: Good to see you.

COMMITTEE MEMBER JONES: Yeah. As you know,

CalPERS has substantial investments in Japan. And maybe

right before you came, I was with a group that had went to

Japan to talk about corporate governance, because we were

concerned about our investments in Japan.

So I know that you've implemented a strategy on

the corporate governance now. So could you kind of give

us an update where you are in that strategy?

MR. MIZUNO: Sure. It's probably -- it's

probably makes sense for me to go through our ESG

initiatives to address your question more clearly, because

we never separate like a corporate governance issue from

like the other issues, like social, and environmental

issue, because we promote ESG investment altogether.

So for us, corporate governance is one of ESG


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issues, rather than a one specific issue. So let me -- if

you run out of questions on the who GPIF is, I probably

wanted to just move on to the other slide to address the

Henry's question better.

COMMITTEE MEMBER JONES: Right. Okay. That's

fine. That's fine. Okay.

MR. MIZUNO: Mr. Chair.

CHAIRPERSON FECKNER: You done, Mr. Jones?

COMMITTEE MEMBER JONES: Yeah. Oh, no, I do have

another one. Go back to the chart that shows the

governance structure. The audit committee, it says that

the -- it's the same body of members that are part of the

Board of Governors that's part of the audit committee. So

what's your relationship to the audit committee and do you

have an internal audit committee.

MR. MIZUNO: We do have an internal auditor as

well, so -- but this is -- this is only one committee like

board has. Like CalPERS gets, they have Investment

Committee as well as the -- what's other one?

COMMITTEE MEMBER JONES: Health.

INVESTMENT DIRECTOR SIMPSON: Pension and Health.

MR. MIZUNO: Pension and Health, the committee.

For GPIF it's only one committee the Board has is the

audit committee, who works as sort of semi-external

auditing board. And also one permanent board member is


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stationed in our office to report to that audit committee.

So it's very rare for me to work directly with audit

committee, but audit committee works as a bridge between

investment team and board.

So I don't -- you know, GPIF meet with our board

every month, but only for two hours. So it's not like

CalPERS. I don't know how many days you meet every month,

but we meet like --

INVESTMENT DIRECTOR SIMPSON: Three.

MR. MIZUNO: Yeah, three days. Our case, two

hours or three hours. So this like audit committee

function as the sort of liaison between the investment

team and a board, so that we don't need to, you know,

report everything in detail to our board.

COMMITTEE MEMBER JONES: Thank you.


CHAIRPERSON FECKNER: Mr. Miller.

COMMITTEE MEMBER MILLER: Yeah. Thank you for

taking the time to spend with us, sir. Really appreciate

it.

I'm kind of curious, you know, for us having kind

of direct engagement with our beneficiaries and the

members we serve is a big part of kind of the

transparency, and accountability, and results equation for

us, and things like this generational equity issues that


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are really important to them. So for you in your system,

what's that relationship with the members, the

beneficiaries like? Is that through the Board of

Governors or through the voice of the customer via the

government, or do you interact directly with them in some

ways? Like you can see in our audience, we always have

very active members and organizations to communicate with

us.

MR. MIZUNO: Thank you. That's a very good

question and very important question for us. And when we

have been discussing -- we were discussing about this new

governance structure, that was one of the topic this being

discussed very heavily, because now it used to be GPIF

investment team was also responsible policy asset mix. So

the other investment team before this new governance

structure felt full-heartedly responsible for the

performance.

But now -- actually, they picked the -- pick up

the CalPERS motto and the Governor -- Board of Governors

decided policy asset mix. So to be fair, 80, 90 percent

of performance was actually dictated by the Board

decision.

INVESTMENT DIRECTOR SIMPSON: Yes.

MR. MIZUNO: But in reality and in real world,

nobody hold that board accountable for the performance.


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It's going to be investment executive. So nobody want to

listen directly from our board about our investment, so

it's got to be us who try to communicate with general

public how we manage.

That's something I always feel unfair to be

honest. But --

CHIEF INVESTMENT OFFICER MENG: You're not alone.

MR. MIZUNO: Yeah, we're not alone.

But the -- basically, board make those kind of

very, very critical investment decision. But when GPIF

tried to communicate with our stakeholder beneficiary,

which is Japanese general public or -- and also, usually,

we reach out to general public through media. Media only

interested in our explanation how we are managing it. So

we take the responsibility.

Given we don't have a target audience, it's

always really difficult to communicate and/or convey the

very clear message, because we have no idea who's

listening. And at least the CalPERS beneficiary, in my

opinion -- in my -- you know, the understanding, at least

served for the public -- you know, the -- you know, for

the local government. So the people seems to have the

public mindset, I guess.

But we are serving every single Japanese person

who has a totally different opinion from each other. So


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the communicating well with the general public is such an

impossible job for us. So we created a lot of like a

reports and we put everything on the Internet. We don't

broadcast the board meeting like you guys do, but we put a

lot of information on the -- on the homepage. But we

always get criticized we are not transparent enough, which

I think is impossible task to achieve.

And if you don't mind, I just wanted to just talk

about the transparency. Over the last four years, we

continue to increase our transparency. But as a result,

we haven't been able to affect the people's perception or

expectation of GPIF. So I concluded transparency itself

wouldn't solve the problem.

Okay. And I always feel like, you know, the

Board and the people, particularly people from the

investment industry or finance industry is expect the

investment team to outperform the market. But in reality,

if you take the analogy of NBA, like, you know, the

basketball team. CEO is like, you know, the head coach

and all of our conversation of our game plan with our

owner or executive has to be broadcasted.

Beating the market, managing a public pension

fund is almost impossible job. That's one thing I wanted

to just convey to the Board of CalPERS. You know,

transparency sounds good, but in reality, it, you know,


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really make investment team play handicapped game.

So we started discussing which area we should be

strategically transparent and which area which actually

information we should be trans -- you know, strategically

less transparent. I'm sure that the -- I understand that

at the CalPERS Board now the private equity is one of the

hot topic. I used to manage one of the biggest private

equity fund.

And private equity fund delivers better return.

Nobody argue about it. The reason why, because we are

playing the game of not transparency, you know, with a lot

of private information, right?

So on one hand, I think GPIF and CalPERS has to

continue to make effort to have better communication with

the stakeholders, but I would like to ask the -- our board

as well as the CalPERS Board to be empathetic to the

investment team who have to operate in that kind of

handicapped environment. It's really hard.

You know, we need to tell them our asset

allocation start. When we start discussing the new policy

asset mix, we under pressure from general public we need

to disclose it. It's very difficult to manage the fund in

that kind of circumstances.

If you don't request us to outperform the market,

it's fine. But all the board expect the investment team


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to outperform the market. And without, you know, the

operating with that kind of transparency requirement, it's

just impossible.

So I think the Board side -- Board and the

investment team need to work together to improve the

communication with the stakeholders. But increasing the

transparency doesn't seem to deliver what we are talking

about. So that's another reason I feel always empathetic

to the CalPERS, because we are under very similar pressure

by general public and also the media about what we are

doing.

COMMITTEE MEMBER MILLER: Thank you for your

insight, sir.


CHAIRPERSON FECKNER: Very refreshing to hear

those comments, so thank you.


CHAIRPERSON FECKNER: Ms. Middleton.

COMMITTEE MEMBER MIDDLETON: Okay. Thank you,

Mr. Chairman. And thank you, sir. It's a pleasure to

hear your insight.

I'd like to shift gears a bit. You've got

incredible experience in the global economy. As you look

forward over the next few years, in the next 25 years,

that what are the most significant concerns that you have


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that would cause major disruption to the global market

economy?

MR. MIZUNO: Thank you. That's a very good

question. And several issues I'm very concerned about.

You know, I think that -- Ben probably the same, but every

time I'm the panel at the conference, the moderator try to

ask me what may -- you know keeps me up at night? And I

always answer that it's Netflix --

(Laughter.)

MR. MIZUNO: -- and YouTube, but --

(Laughter.)

MR. MIZUNO: I watch the CalPERS Board media on

my way into the conference. It totally kept me awake 11

hours.

But the one is the aging society in a developed

market -- developed economy. You know, Japan has been

trying everything to get out of deflation over the last

two decades. We still haven't been successful. You know,

how much money Japan has got -- you know Bank of Japan

printed and how much stimulus Japanese government

implemented still we cannot get out of the deflation. And

it has to do -- it obviously has to do with the aging

society.

And the globalization of the economy and the

basically just made the other manufacturer's job


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impossible to -- you know, transfer the cost into the

final -- you know, the final, you know, consumer pricing.

So there's a huge pressure to keep the other -- you know,

the price down and inflation down.

And GPIF is now allocated 50 percent of our

portfolio to fixed income hoping fixed income portfolio

provide hedge for the other -- you know, the drawdown on

the equity portfolio. But last 4th quarter of 2018, GPIF

reported the -- it's only mark to market -- it's not real

loss. But the mark to market loss of $150 billion just

over three months.

You know why? I have been in this industry for

throughout my career. I look young, but I'm 53, so I have

significant experience in investment, okay? I have a

young looking gene.

(Laughter.)

CHIEF INVESTMENT OFFICER MENG: Keep working at

GPIF and you'll --

(Laughter.)

MR. MIZUNO: I never had gray hair before I

joined GPIF.

(Laughter.)

MR. MIZUNO: But working for the public pension

fund, started growing -- I started growing gray hair.

(Laughter.)


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CHIEF INVESTMENT OFFICER MENG: Very try with me.

My mom just came to visit me a couple weeks ago. She

noticed you got white hair now.

(Laughter.)

MR. MIZUNO: I know. I know.

So what was I going to say?

Oh, the reason that we had to report the $150

billion loss over three months, I lost -- we lost as much

as the -- not as big as CalPERS, but the major U.S. public

pension fund has only $100 billion. So we lost as much as

major U.S. pension fund over three months.

The reason why was I never seen in my whole

career, as an investment professional, every single asset

class we lost money. Okay. Because conventional wisdom

of the portfolio diversification is like when we lose

money in equity, we make profit in fixed income, right?

But we lost in every single asset classes. And we also

lost in currency translation as well. It never happened

in the past.

So I think it has something to do with the

mandatory easing, all those kind of things, which we

actually created over the last decade and we are now, you

know, facing the situation global market is so linked.

You know, when we woke -- wake up and find out the New

York Stock Market, the -- you know, the plant, we --


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everybody expect the Tokyo market will go down as well,

right?

It used to create a global diversification. So

when the New York goes down, the Tokyo used to go up. But

now, every market move in the same direction. So this is

actually it's really concerning to me. You know, the --

whether the conventional wisdom of the portfolio

diversification really save us? And no wonder why

everybody trying to increase the private -- you know, the

asset or like a private investment, because obviously,

it's not correlated to the public market. But that's

another thing.

And the third one is I still don't know whether

it's going to be a, you know, net positive or negative.

But the AI going to replace a lot of jobs, you know. But

when the car replaced the horses, I think a lot of horse

owners very concerned about it. But in the end, we

benefited from the car.

(Laughter.)

MR. MIZUNO: So I don't know, we may benefit

from -- like from AI. But for the time being we will see

the difference in some people win it -- you know, win with

that, and the other people will lose with it.

And -- but this impact of AI in the business is

going to be more significant than people think. So that's


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why one of the initiatives we are making is that work with

the Sony computer science laboratory to use AI to monitor

our asset management behavior.

So there's a lot of room for the -- our industry

to use AI. But, you know, if you think about it, this is

an industry where there are, you know, thousand of million

dollar bonus paid people. I really don't think that all

of them will managed to keep that kind of high

remuneration.

But to conclude my answer to your question, I

think the other -- how the AI will affect the industry

landscape is going to be the big topic, whether it's going

to be negative or positive. At the moment, I cannot

judge.

COMMITTEE MEMBER MIDDLETON: Okay. Thank you.

CHAIRPERSON FECKNER: Thank you. And I feel your

pain, Ben. When I started here, I had hair and this

wasn't white, so...

(Laughter.)

CHAIRPERSON FECKNER: Ms. Olivares.

MR. MIZUNO: Okay. So --

INVESTMENT DIRECTOR SIMPSON: There's one more.

CHAIRPERSON FECKNER: Wait just a second.

Ms. Olivares.

COMMITTEE MEMBER OLIVARES: Hi. Thank you, Mr.


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Chair.

I wanted to understand better your performance

based fee structure. It's a little different. I find it

quite interesting.

MR. MIZUNO: You mean for the asset managers?

COMMITTEE MEMBER OLIVARES: Yes.

MR. MIZUNO: Okay.

COMMITTEE MEMBER OLIVARES: So if I understand

correctly, if an invest -- or an asset manager doesn't

perform in terms of reaching alpha, then they're paid

based on a passive index, is that correct?

MR. MIZUNO: Yeah. I think the -- our new fee

structure is -- has been very controversial, because

basically we challenge the industry saying like, you know,

active manager seems to be remunerated much better than

they should be. Not about the absolute level, but also

the fee structure is not really, you know, the -- align

our interest with asset managers.

So as you know, the active manager's performance

is conventionally measured their performance relative to

benchmark.

COMMITTEE MEMBER OLIVARES: Um-hmm.

MR. MIZUNO: And there is also the big debate in

the finance academics that the -- whether active

management will deliver any value or not. Because on


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average, you know, the -- as you know, the active

management has never beaten the other -- you know, passive

management, while they charge much higher fees.

COMMITTEE MEMBER OLIVARES: Right.

MR. MIZUNO: So through our GPIF's own

experience, you know, 80 percent of our investment team

resource was used to select the asset managers and monitor

them, et cetera. I mean, active managers. But in

reality, net of fees, historically our alpha net of fee

was zero. So that means we wasted our resource spending

energy on selecting active managers.

So -- but the conventional reaction to that was

you are not good at selecting good managers, right? So

it's your fault you selected bad ones. But in reality, if

you look at the statistic, active never, you know, beat

the market net of fees. So that's why we thought we need

to change the game, rule of the game, to make it possible

for us to win.

And the game -- the new rule of the game we

implemented was active managers should be only paid as

much as passive manager being paid, if they don't deliver

extra return. It's very simple.

(Applause.)

VICE CHAIRPERSON TAYLOR: Yeah.

MR. MIZUNO: Yeah, it's very simple. And then


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unfortunately, last year, GPIF managed to save $200

million in active management fee, because majority of

active managers failed to deliver target alpha, but it

will give us much better chance. When the market is

better, right, the -- we'll probably be able to get the

alpha out of the active management. And then when you

look at the long-term performance of our active portfolio,

we pay very little when the performance is low and we pay

higher when they make the other actual returns.

So the probability of GPIF winning from active

portfolio is now much better and also it makes a lot of

sense as you give me some, like applause, they shouldn't

be paid if they don't deliver something, which they

promised, right?

(Applause.)

COMMITTEE MEMBER BROWN: I agree.

MR. MIZUNO: Because unfortunately, I'm -- you

know, I would recommend you to read some of the white

paper about the fee proposal on our website. And it

illustrate what the discussion we had with the asset

managers, because at the beginning, all the asset managers

are trying to refuse it. They argued it's not fair. And

GPIF now is again trying to use our power to hammer the

fees.

But what we said was, first of all, if you don't


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deliver alpha, you are just as good as passive, right, so

you should be paid as -- you know, as good as passive.

And we designed the participation ratio to break even at

their target alpha, right? So if they deliver the alpha

what they proposed us, they should be paid as well, right?

So they are -- I told the asset managers it

doesn't make any sense you complain that we are trying to

hammer the fee, because if you deliver what you're

proposing, you're receiving exactly the same amount of

fees.

But throughout the GPIF's, you know, the history,

only 18 percent of our active managers ever deliver target

alpha. You know, when you select asset managers, and you

saw -- when you agree with your investment team, you ask

them, you know, how much alpha you are trying to achieve

by taking this risk, right? So that's called the target

alpha.

And suddenly throughout the GPIF's experience,

only 18 percent of our active manager ever deliver the

target alpha. So I said, this industry should be gone,

because, you know, the -- if this industry, only less than

20 percent of product performs as, you know, what it says

on the product box. That industry should be either

eliminated or underperformers should get out of the

competition.


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But we manage to -- you know, they manage to keep

the industry intact, while academics argue active

management don't deliver anything. I still believe human

can add value and active management can still add value,

but we needed to change the game -- the rule of the game,

so that we have better chance of winning and delivering

alpha. So that's the whole basic idea behind the other

fee structure.

COMMITTEE MEMBER OLIVARES: Can you show slide

28, which illustrates your point?

MR. MIZUNO: Yeah.

CHIEF INVESTMENT OFFICER MENG: So if I may add

something to Ms. Olivares question. So this is just one

of the many examples Hiro and GPIF has been the thought

leader in the industry. So this creative fee structure.

Once GPIF designed it, not only they use it to their own

benefit, they also put it out on their website as a white

paper.

And at that time, I was still working at SAFE.

So my senior emitted for me a copy of the paper, asked me

and the team to study. So that's go to say again that,

you know, Hiro and GPIF's commitment to the entire

industry, not to GPIF, to get better alignment for

long-term investors, such as GPIF and CalPERS.

Yeah. So the paper -- all the detail methodology


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is on its website.

COMMITTEE MEMBER OLIVARES: Thank you.

MR. MIZUNO: So this is the slide you want to put

on?

COMMITTEE MEMBER OLIVARES: Yes.

MR. MIZUNO: So actually this is the one of

very -- you know, the many initiative I -- we started.

And -- but the fee structure, which has been quite

controversial, but now -- actually, 43 out of 46 are asset

managers in the end agree to this. And three manager who

walked away, I directly discussed with their executive why

they don't accept this.

And one manager says, they have -- they don't

believe that they can ever deliver target alpha. And I

said why didn't you tell us two years ago, okay?

(Laughter.)

MR. MIZUNO: And then the other asset manager

says, you know, we agree with this concept, but we have

much easier money, right? Some of the other customers

willing to pay fixed fee. Why would they have to take the

GPIF?

So I think this type of initiative, as Ben

mentioned, I really call for the collaboration among asset

owner to make it as a -- like a more industry like a

practice.


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Another good example -- sorry, I just sort of

jump onto other issues, which is again transparency. When

I was a GP, we used to hate CalPERS, because CalPERS

disclosed everything.

And, you know, we used to say the private equity

market, like CalPERS is not the other -- you know, the

ideal customer, because once we partner -- we get the

CalPERS money, all the information will be disclosed. And

now, I mean, GPIF, I'm telling our GP, we are going to

disclose everything, because the point is when CalPERS is

only one, it will work against you guys. But if we join,

and if other people will join, it will become market

standard.

So some of those things, as I mentioned, we have

to be more strategic about the transparency argument. But

the -- there is something if GPIF, and CalPERS, and some

big asset owner decide to work together, we can affect the

market. That's the reason we posted this in a public

domain. Because when I started negotiating with the asset

manager, first thing they told me was -- ask me was are

you going to disclose this fee to the public?

And I knew my job would have been much easier if

we -- I had told them we are going to keep it secret to

negotiate a fee. But we told them, we are going to

disclose this, because we have a very strong, you know,


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the commitment to change the market practice.

So, you know, if the one party does it, it goes

against -- it works against them, but it will become the

industry practice -- you know, it will change the things

for the better -- for the better of everybody.

CHIEF INVESTMENT OFFICER MENG: Yeah. So this is

one example where Hiro mentioned early on strategic

transparency. So what we should be more transparent,

what -- where we should be less transparent, how to best

serve our fiduciary duty. So this is one example of

strategic transparency to the benefit of our

beneficiaries.

MR. MIZUNO: Yeah. So CalPERS is not going to be

alone to disclose the fee on the private equity, because

we are joining. But fee is okay, but the other things, I

mean, some transparency requirement which I used to hear

from some of the public pension fund including CalPERS,

which really affect the private equity money's ability to

deliver, you know, the outperformance.

And so in some of those areas, I think the

other -- the public pension fund board, I know, executive

team has to be more strategic.

But, you know, it's not about hiding, but some

other things that we probably be able to just come up with

more strategic approaches.


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So can I just go through some of the other -- you

know, the other initiatives we have been implementing, so

that I can -- you know, the -- invite some other

questions?

CHAIRPERSON FECKNER: Sure.

--o0o--

MR. MIZUNO: So this is a snapshot of our ESG

investment. You know, the first thing I did when I came

into this position is to analyze who we are? And we are

trying to find the best role model of the -- you know, the

asset owner business model. And after three or four month

search -- or research, I concluded we need to come up with

a new theory or like a new business model, because nobody

actually, you know, give me the impression that, yeah,

this is going to be role model for us to mimic.

So the first thing we did was we're actually

trying to characterize who we are. And we concluded those

two key words should describe GPIF the best. One is

universal owner. The other is cross-generational

investor.

Universal owner is actually, you know, appeared

in classic finance textbook many years ago. But I was

told by Harvard Business School professor, GPIF probably

the first one to take that out into the -- out of textbook

into practice.


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So we basically own the wide universe of the

capital market. So, you know, the conventional wisdom of

the asset management we did how to beat the benchmark, how

to beat the market is not suitable for our -- you know,

for GPIF or CalPERS. We are a universal owner. Because

given our size, we won't be able to select, you know, only

the good performer or when we look at the ESG, you know, E

is a good example, climate. I'm against the idea of

divestment. The reason why is when we divest, ownership

of those programmatic company will be shift from the

responsible owner to irresponsible owner.

So it doesn't make any difference, because even

that business is outside of our portfolio. If they

continue to pollute the environment, we need to suffer,

right? So the universal owner should pay more attention

how to make the whole capital market a whole business, or

whole society more sustainable. That's going to --

because that's going to affect our portfolio somehow, some

day.

So that's the one the characteristics of the

universal ownership. And when I spoke at the Harvard

Business School, some student asked me, well, GPIF, it's

easy to understand you are universal owner given your

size. But what if I'm a CIO of like a small -- you know,

the endowment of pension fund, should we act like other


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universal owner or not?

My argument was, as a community, we are universal

owner, regardless of your size, because you may be able to

outperform the market for the short period of time, but

the long period of time, you are basically owning the

global economy. So the universal ownership is a really,

really important key characteristic of GPIF. And also, I

think it should be suitable for the other asset owners.

And CalPERS, no doubt you are universal owner.

And the other one is a cross-generational

investor. We used to call ourselves long-term investor.

But when I was making a speech at the CFA Institute annual

meeting in Hong Kong, I asked the other panelists and also

audience what's your definition of long-term investment?

Yeah, well, the most common one is three years.

(Laughter.)

MR. MIZUNO: And the one young guy told me, I was

told by my boss that anything longer three days you should

take it as a long term.

(Laughter.)

MR. MIZUNO: Right? Because they are like hedge

fund. Okay. So I came to realize long term is so

subjective. And everybody seems to have a totally

different time frame when we say -- we say long term.

And then I started using super long term. And


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one person said, oh, for me super long time is three

months. Okay. I gave up on the long term.

(Laughter.)

MR. MIZUNO: So that's why -- and then we started

using a cross-generational investment, because are

managing money not for the first people who already

retired. We are managing money for the people who are not

born yet, right?

So that we are cross-generational investors. And

when we ae cross generational investors toss, everybody is

started thinking we are talking about a third 20, 30 years

minimum time frame.

And GPIF's poly asset mix designed to optimize

our performance over 25 years. And we are definitely at a

cross-generational investors so

So for the universal ownership characteristics

and for the cross-generational investor characteristics,

we concluded GPIF should pay much more attention to how to

make the capital -- whole capital market more sustainable.

So that's the other sort of backdrop of the --

all of our ESG initiative. And we have been asked whether

taking ESG into account is against a fiduciary duty? And

I said fiduciary duty meaning, you should be loyal to your

beneficiaries.

And if we think we are universal owner,


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cross-generational investor, I cannot think of like, you

know, taking ESG information into our investment decisions

against our fiduciary duty. So we actually made that

statement very clear to our asset managers.

And funny thing is when I discussed with the

asset manager individually, everybody tells me ESG is

going to be -- it probably is already, but is going to be

the most important critical financial investment

information for their portfolio management.

And then argument is then practice it, because if

they think that transformation is going to happen over the

time, we want to be the first one to do that, right?

That's how we can make the better return.

So the GPIF is really committed to become the

ultimate ESG investor to make sure our whole capital

market is going to be sustainable. And the inconvenient

truth of the asset management is, you know, as I said, we

spend 80 percent of our resource trying to select the

active managers. And we made a huge effort to build

the -- you know, the alpha, or accumulate extra return.

But I don't know about the CalPERS, but my study is

showing all the asset owners effort to make extra return

every 10 years wiped out by financial crisis. That means

the beta is so important.

INVESTMENT DIRECTOR SIMPSON: Thanks very much,


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Hiro. I just wanted to flag a really practical example of

how GPIF and CalPERS are putting these ideas into

practice. And it's through tackling climate change, which

is systemic risk, also presents opportunity. But what

we've done is team up together and form a network of

what's now $34 trillion in investors that stretch from

Asia, Europe, North America. And what we're doing is

focusing on just over 100 companies where - again, we love

data just like you - when we did the analysis, Divya

Mankikar did this important work, we found that these 100

companies are responsible for the vast majority of the

emissions.

So in other words, we can focus our attention and

start to work with these companies. And our goal is a

transition to get to 2050, to get to net zero globally.

But we are confident that we can do this as long as we

work in partnership, as long as we're focused, as long as

we're long term. And we're already getting some big

results at huge oil companies like Shell, which has a

written agreement with us, and many others as well.

So I think what we're finding is that we can take

this idea that GPIF has, that we fix the market through

partnership and through engagement. If we walk away, we

don't get the chance to change things. You know, we just

have to go and hide in a corner and hope it all works out,


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but actually we need to fix it. And that's really what

fiduciary duty is it's getting things fixed.

So I just want to thank Hiro for his personal

commitment, because his role through our Asia Advisory

Group, which Hiro and I both sit on, is actually now

leading us to start looking at strategy for China based on

the success that you've led in Japan. I think it's a

very, very practical and a very, very fruitful way of

working together.

MR. MIZUNO: Yeah.

CHIEF INVESTMENT OFFICER MENG: And on the note

of ESG investing, as Hiro just mentioned, that it's

critical for us to catch the moment. But also with the

invention, we have to be mindful that in the Investment

Office is shared with a team and we're actively

researching this topic, when it's right. So I use the

surfing analogy, right? We definitely would like to catch

the wave, but you don't want to be too early in terms of

deploying capital.

If you're too early, you'll be, as Howard Marx

once said famously that, you know, if you're too much

ahead of your it's distinguishable from being wrong. But

we need to capture the wave. And if you're too early --

if too late, we miss the wave. We may be crushed by the

wave. If we're too early, we have to take on too much


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risk -- tracking error risk and sometimes cost getting the

market ready.

But what we can do together -- and also ESG topic

is so broad. Some strategies may be ready for deploying

capital. Some strategies probably stay -- still warrants

monitoring, and research, and getting data. But we should

closely monitor when the wave is forming. And if the wave

is forming, we want to surf on top of that wave. And that

what we can do form together at the partnership

continue -- continue to be the advocates of these topics.

Educate the market the risk, so that we can create the

wave together. And so also we can surf together to

benefit from the moment and the benefits of our members.

So we just be a little bit cautious. ESG topic

is so broad and they're so different. So we had to apply,

depending on which topic we are talking about, which

stage? Are we in the stage of research, in the stage of

monitoring, or in the stage of actually deploying small

amount of capital. But regardless, we need to join

together to advocate these key long-term initiatives.

MR. MIZUNO: Can I say one thing about ESG

investment? I think the -- when I started advocating

internally about the ESG investment, there are a lot of

skeptics inside of my team. And I analyzed why they are

concerned or skeptical about ESG investment.


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And one reason I wound out was a lot of people

think delivering extra return is only way to satisfy

fiduciary duty. So the other -- whenever they discuss

about ESG, they try to, you know, address whether taking

ESG into the investment decision will deliver extra return

over the market.

All right. So we now pay a lot of attention to

index provider and quality of index, because, you know, we

use a lot of passive management like the CalPERS. Passive

management -- if you discompose the passive management,

it's -- basically, it's the index tracking and engagement

with a company, because they are actually the bigger owner

of the company, right? So that we demand over passive

management that actively engage with their portfolio

companies.

But basically, the passive management is a

composition of their index tracking and engagement. We

now urge our passive managers to engage more proactively

with the asset -- the portfolio companies, which CalPERS

do directly.

But this index tracking, I think historically, we

paid too little attention to index selection, because we

basic -- used to pick the -- whatever is the most popular

index as the policy index. But in reality, index provider

dictate what we ended up holding. So we started engaging


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directly with the index providers. And we tested several

ESG-themed weighted indices. And again, some people are

skeptical whether this will fix -- satisfy fiduciary duty

if we underperform the benchmark.

So we designed the benchmark to carry the same

return and the same risk level trying to, you know, prove

we are making the -- bringing all our financial expertise

to select the index, which is not going to lose to the

market, but obviously some index, as I show -- showed in a

slide underperform and the other overperformed.

But we keep sending a message to Japanese public,

GPIF, the ultimate goal of ESG index investment is to make

Japanese capital market more sustainable.

And because index has much more powerful effect

over the industry -- because active manager has a dilemma,

if they think this company is good because of the -- for

their ESG the qualification, and when the price goes up,

they need to sell it to realize the extra return. But the

passive manager, they tend to hold almost perpetually. So

they should be the biggest beneficiary of their long-term

sustainability of the businesses.

So that's why we have been very successful

communicating with Japanese general public. And last

year, there more than 4,000 newspaper article talking

about the GPIF ESG investment.


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CHIEF INVESTMENT OFFICER MENG: 4,000?

MR. MIZUNO: 400. 400. And almost every single

article were very supportive, because they like the idea

of GPIF trying to contribute to make the capital market

and Japanese -- the business as a whole more sustainable.

Okay. So that's the reason why we have to show some

negative performance relative to benchmark with the FTSE

Blossom Japan ESG Index. But that we didn't get much

criticism.

And the other thing I want to mention is like

fiduciary duty is one thing, but these days, as an

investor and a shareholder, we expect the corporate

executive to deliver a lot of different things. When I

faced the other asset managers who are skeptical about the

ESG 4 years ago, I asked them the question, what if your

portfolio company CEO tells you my job is pay you the

dividend, anything else I don't care? I'm a CEO of this

business. My job is to give you the shareholder return.

I don't care about the corporate -- the worker's welfare.

I don't care about the environmental impact. I don't care

about the gender diversity or social impact. How would

you react?

Every single asset managers of GPIF told me, they

cannot accept it. And if they cannot accept it, why they

think it's acceptable to ourselves?


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So I think the investor has a responsibility, but

it's not going to be mutually exclusive. We deliver

financial return, but we pay attention to those risks. We

achieve both. And we now expect the corporate executive

to achieve both. Of course, we should expect ourself to

achieve both.

So that's the other different way to take a look

at the ESG. But it makes 100 percent financial sense.

But I think beyond the financial, you know, justification,

we are demanding corporate executive do the same. And we

are going to demand ourself to deliver both. So that's

the other -- the highest level concept we're actually

trying to convey.

And sorry, Henry, I just forgot your question,

the corporate governance.

COMMITTEE MEMBER JONES: Yeah.

MR. MIZUNO: So the corporate governance we

regard as one of the major topics in the ESG. Every year,

we ask our asset managers which ESG topic you think are

critical and you are going to discuss or engage with their

portfolio company on those issues. So they give us a list

of the different like ESG issues.

And generally speaking, the list of the tops are

usually climate and gender diversity, those kind of

things. But as far as the our Japanese equity managers


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are concerned, the top lists are made of all the corporate

governance issues. So I think the -- a lot of the -- for

a lot of investors, one of the biggest weakness of

Japanese businesses are the weak corporate governance. So

that's actually where the Abe administration decided to

make a reform. But also the investor thinks that the

Japanese corporate governance is not as -- not very

strong.

So I think all our asset managers promise with

us, because we made -- make it very explicit in our

strategy principle, our asset managers should engage with

the portfolio company on critical ESG issues of their

choosing, right?

So if they choose for the Japanese companies,

corporate governance is the critical issue, they are

required to engage with that Japanese company on that

issue.

And one good observation to share with you was we

actually disclose this as well, but the -- now, we use

three different index provider of ESG indices FTSE and

MSCI and S&P. And we monitor the correlation between the

other -- the ESG rating by different index provider on the

same company. And for Japanese corporate, you know,

they -- well, you can see that on our website, we actually

disclose a scatter map. And the correlation between the


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different -- the ESG rating agency on the change up in

these companies are very little, meaning the ESG rating

has not been converged yet.

And there are two possible explanations why.

One, the sophistication of rating agencies still not

there --

INVESTMENT DIRECTOR SIMPSON: Yeah.

MR. MIZUNO: -- or data is not comprehensive.

INVESTMENT DIRECTOR SIMPSON: Both.

MR. MIZUNO: You know -- both. Probably both.

So we decided to promote and actually disclose

those -- the other, you know, discrepancy to promote the

more convergence. And over the last 3 years, we see much

more convergence in the E rating. So I think the asset

manager's view be on the environmental climate impact on

their portfolio has started merging.

S it seems impossible, because they -- we -- when

we ask them what kind of the topic they are actually

evaluating in the S area, you know, they actually evaluate

different things. It's actually more difficult to

converge.

G is -- also is not converging, because I think

the -- even if they have the same governance structure,

the effect of the governance is very different from one

company to another or one market to another market. So


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it's much more requires the other, you know, tailor made,

you know, approaches on the corporate governance.

So corporate governance is not only about the

formality, but also requires the other real reflection of

the corporate culture, and also the other sort of market

they are operating. But we think the corporate governance

is a very critical issue for Japanese company. That's

what the -- our manager tend to agree.

Okay. Thank you.

Any other questions?

CHAIRPERSON FECKNER: We do have a few others.

Mr. Perez.

COMMITTEE MEMBER PEREZ: Thank you, again.

This is probably more for Ben. Can we migrate to

something similar to them as far as the fee structure for

our managers?

(Laughter.)

CHIEF INVESTMENT OFFICER MENG: Not only if --

can we, we have been. We have been benefiting from our

team, as you know, that -- even before I came, CalPERS has

been always driving the alignment fee interest with our

external managers and trying to cut down fees, improve

transparency. So we are very proud to say that we are one

of the global leaders together with GPIF and a few other

asset owners.


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But also, we need also the balance -- to balance.

Current, the market -- as Hiro will tell you, the market

is really hot. And Hiro already shared with you that the

GP community quote/unquote hate CalPERS, because of our

drive for lower fees, better align of interests, and

transparency.

And we keep on saying that, you know, we conduct

ourselves very professionally, respectfully, but with the

GP community, you know, we're also friendly, but not

really friends, because underlying we are still not on the

same side of the table.

So again, back to your question, not only can we,

we have been. And we have been very positive and we have

been a global leader in this field.

COMMITTEE MEMBER PEREZ: And I think, yes, we ask

for more transparency, but I think we're painted into a

box because of the law here.

Sir, there's been a lot of mention of fiduciary

duty, but we're painted in even a stricter sense in that.

We're in even in a smaller box than fiduciary duty,

according to the California Constitution. So how would

you -- I'll read you a brief sentence of what the law says

and then how would you reconcile that with the idea of

accepted fiduciary duty?

CHIEF INVESTMENT OFFICER MENG: So Hiro may or


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may not know the law you're referring to. I assume the

open meeting law?

COMMITTEE MEMBER PEREZ: No.

CHIEF INVESTMENT OFFICER MENG: No. Okay. You

may want to tell Hiro -- give Hiro a little bit of

background what law you're referring to, the context.

COMMITTEE MEMBER PEREZ: Yes, sir.

CHIEF INVESTMENT OFFICER MENG: Thank you.

COMMITTEE MEMBER PEREZ: It says the members of

the retirement board shall discharge their duties with

respect to the system solely, in the interest of, and for

the exclusive purposes of providing benefits to

participants and the beneficiary.

MR. MIZUNO: That's the same as we have the --

what we have. The fiduciary duty is very interesting

concept. That started in the UK and spread globally. But

no constitution really has a very specific definition,

anything better than what's the -- you just described.

And then my interpretation is, basically, what

they are saying is we will work solely for the benefit of

our beneficiaries, right? And on the other hand -- if you

look it from different perspective, that fiduciary duty

concept started in the UK, because it used to be a lot of

political intervention into asset management. And also

there are a lot of the investment professional who try to


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make money for himself with ourselves at the expense of

beneficiary. That's why they came up with the concept of

fiduciary duty. Okay.

Now, we have more than enough transparency that

the -- our investment team has no way to benefit their

own -- you know, the purse, or their own -- you know, make

an investment for their own benefit. And also, I

understand CalPERS and GPIF operating under the most

stringent policy in terms of the sort of corporate entity,

et cetera. So basically, I have no concern that the other

investment team will get some personal benefit.

So the first one, political intervention over

some non-financial information get into the investment,

right? That's actually usually came through board, not

from the investment team, to be very honest with you,

because board is representing a lot of different

stakeholders. It's usually non-financial discussions

comes from our board, too.

Okay. Because investment team is very busy

trying to make money. And we believe -- you know, I

believe that all the ESG factor has become a relevant

factor for the investment. When I spoke on the Milken

Board -- Milken Institute conference, Henry Fernandez, CEO

of MSCI told me in 10 year's time there will be no

difference between ESG index and a market-weighted index,


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meaning -- because every single asset manager we hire

tells me they integrate ESG information into their

investment decision, meaning over the time, the market

will price that in. And so the other ESG index will

become the same as the market index.

But that thing I think is really necessary for us

to satisfy fiduciary duty, knowing those information will

be priced in over the next 10 years, we should take that

into account now.

So, sorry, if I sound like, you know, the --

offensive to the Board. But I think the Board represent a

lot of different stakeholders and different interest. But

investment team usually only concerned about how to make

investment. So the older sort of the input, which I think

is against my fiduciary duty, usually come either through

or government or through our board. And I think it is the

whole reason why CalPERS, I think -- and GPIF is a

multi-stakeholder board. California case, their board is

all investment financial professional. So they are --

they are technician or the expert board. So they actually

discuss investment like the investment team, you know,

discuss.

But our board, and CalPERS, I guess -- sorry, I'm

talking with very limited knowledge, but you are

representing all the stakeholders. So sometimes even if


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we think it makes sense financially, I don't mind our

board tells me it doesn't make sense from their -- you

know, their -- the stakeholder perspective.

But the investment team only focusing on

what's -- how to make the best investment. And I feel

very upset when our board -- our regulator tells me when I

talk about ESG, I actually did not, you know, bring in

some non-financial information into my job. No. I'm okay

actually using it, because we think it's irrelevant

financially. So I actually see no conflict between the

other -- you know, how to satisfy fiduciary duty and how

to take these into analysis.

And thank you for the talking about the fee

structure. I mean, that's actually -- you know, no asset

owner pays enough attention to. Although, I think, it was

against our fiduciary duty to keep paying the fixed fee

knowing their active manager never performed as they

promised, right?

So I think the -- I actually, you know, asked the

CalPERS Board -- and I actually, you know, hope that our

Board is listening to the presentation. You know, you

have to be a little bit creative and flexible, because I

think conventional wisdom of the other portfolio

management is no longer perfect. And we need to think

about other things.


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And you are representing younger generation

started working at the police office. And they really

care about the global environment. Of course, they

should. And I'll be very embarrassed -- you know, two

days ago, we released our new ESG activity report, where

we disclosed our current portfolio aligned with like a 3d

plus, so it's not meeting Paris Agreement.

And an easier solution for us is if we divest

some of the other, you know, the fossil fuel industry, we

can improve the portfolio analysis. But, you know, I

think as a universal owner, we only should be satisfied --

we should sleep well when the whole market becomes

sustainable. Because it doesn't make any sense. Even if

we sell some shares, somebody own the share at the lower

valuation. So they actually make financial benefit as

well as the -- they will continue to affect whole our

system.

So, sorry, it takes too long for me to address

your question, but this is very, very center of our work.

You need to have a clear understanding what the fiduciary

duty means. And it should be creative, because now we

need to take a lot of more information into that

discussion.

COMMITTEE MEMBER PEREZ: As you said, I'm a

police officer, so I read the law, and that's the way I


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interpret it. And the way I interpret this specifically

when it says, "for the exclusive purposes of providing

benefits". It's not their well-being. It's not anything

else. It's just -- so, to me, that means making money for

the benefits.

MR. MIZUNO: Yeah. But we need to make money for

long term. That's the point. It's very easy to make

short-term performance, if we don't care about those kind

of things. But if we're talking about like a 30 year's

time, you know, 30 year's time, the people who are born

here, born today will start working as a police officer.

And we cannot leave a society which is not, you know,

feasible for those generations.

And I'm not philanthropist. I'm not the

environmental activist. But, you know, I actually show

that the GPIF was featured in Harvard Business School case

study. And I was surprised when I was invited to speak to

these students, 400 students attended the classes. They

want to discuss how we should make the capital market more

sustainable and more inclusive.

You know, there are -- those 25 year's old

Harvard Business School students think, they don't want --

they don't think the other -- the conventional capital

market or like, you know, the capitalism will not -- will

survive. So I think if you are running the business, you


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have to concern about how to recruit from those kind of

students body. And everybody is asking questions, like,

whether working for this business is going to contribute

to make the society better or actually damaging the

society.

You know, I definitely recommend everybody to

talk to younger generation. My daughter just graduated

from UK college and finally found a job. But she always

asked the question in the interview how can I contribute

to the world by working -- you know, working here?

That's the question I never thought of when we

were young. And, you know, the employer has to address

that now. And the reason why we call it this kind of

thing holistic approach is it's very difficult to prove

our ESG initiative is adding value to our portfolio over

the next month or so. Maybe over the next 3 years is

going to be difficult. But I believe in 30 year's time,

these kind of thing will make a huge impact.

And, you know, GPIF, CalPERS, what -- regardless

of what we do with our portfolio, we are going to -- we

are going to have exposure to the general economy. And if

the general economy failed to be sustainable, we will fail

to be sustainable.

So I actually think that's going to address your

question. You know, the -- by incorporating ESG, we are


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going to secure the future benefit. And how long is it

going to take to materialize? Probably 10 years as the

MSCI CEO tell us. But I won't be surprised if it actually

started materially in 5 year's time.

CHIEF INVESTMENT OFFICER MENG: Yeah. And if I

may add, additional challenge we face at CalPERS than GPIF

in terms of being a long-term investor, as Hiro just

mentioned that at least in the next 25 years, there are no

forecasted payout. But we pay out more than $20 billion a

year. So why to ensure that we can survive the

short-term, so that we can thrive in the long term. So

that's an additional challenge we have to face.

And the other one is again, as you mentioned,

that the plan is for the fund to run down in 100 years.

So the period, you're tl sell off the asset to pay the

benefit, then you're done. You've served the mission --

the historical mission.

But CalPERS is perpetual. We don't have a

timeline or plan to sell down asset and terminate the

program. So there's another additional layer of challenge

that we have to face at CalPERS.

COMMITTEE MEMBER PEREZ: And I think another --

another aspect is that we're hovering at 70 percent

funded.

CHIEF INVESTMENT OFFICER MENG: Correct.


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INVESTMENT DIRECTOR SIMPSON: Right.

COMMITTEE MEMBER PEREZ: So I mean, I'd have a

little less heartburn, if we were over 100 percent. But

since we're struggling to -- not struggling. Since we're

trying to get that -- hit that discount rate and raise our

funded status, I think we need to make money today.

CHIEF INVESTMENT OFFICER MENG: So there will be

a balancing act. So it's a little bit different that

GPIF.

MR. MIZUNO: They're our chief boss, of course.

I mean, if we don't deliver the performance, we should be

out of our job anyway, right?

So that's what I always struggle. Like, you

know, taking these into investment decision making, I

think it makes 100 percent of the investment financial

sense. But even the people who are argue, it doesn't,

we'll have to achieve both. Like, what we -- that's

exactly what we demand from corporate executive, right?

We expect the corporate executive to deliver a lot of

different things. And we should be -- we should be

required or, you know, we should be expected to deliver a

lot of things together.

So that's why we spend 1 year designing those ESG

indices to perform in line with the other -- you know, the

original benchmark, still achieving better ESG


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performance. So that's where those like prudent expertise

should kick in. You know, we are financial expert. We

know how to design index. And we spend hours and hours to

design ESG index to satisfy the goal you mentioned. So

all our index is designed very carefully not to

underperform. Of course, sometimes up underperform, but

still that achieve the other goals at the same time.

So unfortunately, we are living in the world.

You know, there are several like surveys the Baby Boomer

they think during the other working, they only focus on

making money. And after retirement, they should make some

donation.

But the younger generation think they should do

them both at the same time. And that's not only

generation, but I think the world is changing. And that's

exactly what we expect from our portfolio -- you know,

portfolio company executives, and we should try to deliver

the same.

So if me or, you know, Ben don't deliver the

other -- the financial performance, I have no question we

should be fired, but --

COMMITTEE MEMBER PEREZ: I'm proud of the work

the investment team has done. I want to make that clear.

And Beth does a fantastic job in this area also. The only

glaring example that comes to mind is our divestment from


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tobacco.

MR. MIZUNO: We actually don't divest from

tobacco. I mean, I don't want to create the controversy

here, but --

(Laughter.)

CHAIRPERSON FECKNER: Too late.

COMMITTEE MEMBER PEREZ: It's supposed to be

education and dialogue, right?

(Laughter.)

MR. MIZUNO: Okay. Well -- Okay. I tell you.

GPIF's ESG index is only one index in the world which

include the tobacco industry, because generally speaking,

ESG investor don't like tobacco. So the older existing

already available ESG indices exclude tobacco as the first

negative screening.

And GPIF made it clear at the beginning of our,

you know, selection of ESG indices that we don't accept

any industry-by-industry divestment. So we demanded MSCI

to actually score Japan tobacco using same the ESG, like,

you know, their scoring model. And we told them if they

turn out to be very high ESG score company, we include it.

And as a matter of fact, it was included.

So we are very popular with the Japan tobacco and

tobacco industry, so -- but again, I think it's the --

also, the Board decision, because as I said, Board is


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making decision not only financially, because that's the

reason why the Board has the multi-stakeholders. So if

you decided to -- you know, if the GPIF board decided we

should divest from tobacco, I would divest.

But simply, we are -- when we ask to make a

financial decision, we keep it. And also, I feel

uncomfortable, because I don't know about California, but

in Japan JTI is owned by Japanese government. So I just

thought it's a little bit of self-contradictory. Like,

you know, the government pension fund divest from the

company who owns by Japanese government. So this another

sensitively.

But I think this should be the clear distinction.

Like, investment team make a financial decision, but

sometimes board make non-financial decision. And if you

ask us to make a financial decision, tobacco, you know,

performed very well. But, you know, I have no objection,

if our board tells me to divest from tobacco for the

different purposes or different reasons.

You know, that's a difference between the board

which representing the -- you know, the other multiple

interests -- stakeholder interest or general interest.

Our job is just to make the good investment, so...

COMMITTEE MEMBER PEREZ: Thank you.

CHAIRPERSON FECKNER: Ms. Olivares.


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COMMITTEE MEMBER OLIVARES: Thank you. This is

fascinating to me. I'd like to go back to page 20 of your

deck and take a look at the alpha, particularly under your

MSCI Japan Empowering Women Index --

MR. MIZUNO: Yeah.

COMMITTEE MEMBER OLIVARES: -- 0.65 percent,

right? Can you explain to me what that index holds? I

don't want to get into individual investments too much,

but I find that alpha intriguing.

MR. MIZUNO: Well, I'm very happy to see like,

you know, this women empowerment index overperformed,

because I was most concerned about this index, which

may -- you know, is likely to underperform. And it was

actually recommended by some of our team member like, you

know, it's safer -- reputationally safer for us to go for

the general ESG indices, because it's not very clear where

we underperform or, you know, they overperform.

But when we selected the -- this women

empowerment index, everybody knows that we are kind of

betting on gender diversity's effect on the other stock

performance, right?

And there are several academic researches that

the company a has better -- you know, gender diversity

seems to overperform. But to be honest, I'm not sure,

because it may be like, you know, the company who has the


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more gender diversity meaning, that company's culture

itself is better, right? So it's kind of like which is

cause and which is result, which is not very clear.

So we actually made a strategic judgment. You

know, when people talk about Japanese corporations, there

are two obvious weaknesses the global investor always

criticize about what. One is corporate governance, which

Henry mentioned. The second is gender diversity of women

participating in the workplace.

So that's why we decided to address it. By GPIF,

the biggest owner of Japanese equity market, shows our

belief in gender diversity. We'll promote the more gender

diversity across Japanese industry. And that's again

the -- our concept is we will contribute to make the --

our economy more sustainable.

So if you think that gender diversity contribute

to the sustainability of the business, I think CalPERS

should invest into these indices. And our index is open

for everybody, so I welcome CalPERS to join.

But I think, you know, the -- for the U.S., you

already have the much better gender diversity. But in

Japan, we are catching up. So probably, while we are

catching up, we probably easier to make the other -- the

shorter improvement. And you may if -- even if you may

create the same index using the U.S. companies, you may


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struggle to overperform.

But again, you know, it's not about

overperform -- overperformance, these ESG index trying to

send a signal throughout the system. You know, the active

managers, as I mentioned -- because from the company's

perspective, this guy may sell my stock tomorrow, right,

but the index, they know -- they invest -- they will

continue to hold the stock for ages, right? So that's why

it has much stronger impact on the whole industry.

So it is a strategic decision. I'm very glad I

saw the overperformance, because I was concerned about if

it didn't, I mean, it would actually send a negative

signal to the market that gender diversity does not

contribute to the corporate performance. So I'm really

glad at the moment.

And when I presented to -- this to Japanese

Business Roundtable at their Gender Diversity Committee,

they ask me whether I think this index will overperform or

not? And I responded saying if you -- women work well, it

should over perform. Because we only believe -- we -- all

we can do is we believe in the company has the better

gender diversity will have a robust performance, but it's

not us to prove it. It's them to prove.

So please ask the other -- your investment to

join us to support those kind of gender diversity index,


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because this is not where the biggest gender diversity

index in the world.



Ms. Middleton.

COMMITTEE MEMBER MIDDLETON: Okay. I think some

of what I was going to ask has already been asked. But to

put it in very simple terms, it seems to me the case you

are making is that ESG contributes to the long-term

stability and sustainability of our markets, and that all

of us have a vital vested interest in achieving that.

MR. MIZUNO: Um-hmm.

COMMITTEE MEMBER MIDDLETON: And I think that is

in part the answer to the question of should we be making

short-term decisions that may have greater profitability

for -- in the very short-term.

MR. MIZUNO: Thank you. That's the sort of

fundamental and the question we have to address. And

again, you know, I always tell my team, like, we need to

achieve both, right? Because that's exactly what we

expect from the corporate executives. You know, they

never ask investors do you want the short-term performance

or do you want the long-term performance. They never ask,

because investor demand them to deliver both, right.

And I don't -- I think I would say why we are


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different. So the other -- we have to deliver both. But

there are certain cases we find is a bit conflicting,

short-term return and long-term sustainable performance.

And I think it should be reflected in your investment

belief and the other characteristics of your fund. GPIF

is that we are literally a universal owner and

cross-generational investors. I think when we face that

kind of conflict, we should prioritize longer term

sustainable performance.

But, you know, again, coming back to fiduciary

duty debate, I always find it's very strange, because when

you dis -- you know, people discuss this is against or

for -- pro fiduciary duty, they don't talk about the --

what kind of the customer they are serving, right?

Because if my customer ask me to give them --

give their money back next month, of course, I don't take

the ESG into my account, my investment. It totally

irrelevant, right?

But if we are talking about 20, 30 years, I'm

convinced all those ESG issues are relevant, the factors.

And the other thing I want to mention is like, I'm on the

board of PRI, where they are -- they try to, you know,

make advocacy of the ESG. And there's some difference in

the opinion. Some people think ESG should be a source of

return. The other people think ESGs are potential risks.


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And my observation is it's almost unanimously

agreed within the investment community, ESGs are

contingent risks to portfolio. So if you have a trouble

to justify or convince yourself that ESG is a contributor

to performance, just use that as risk factors. Because if

you reduce the risk factors, your risk-adjusted return

will improve anyway, right?

So I think the other -- you have to decide. As

far as GPIF is concerned, so far, we have been using ESG

as risks rather than opportunity. We use SDGs when we are

trying to convey some future opportunities for the -- when

we talk with the business -- you know, the business

executives. But ESG we basically use as a risk, rather

than opportunities.

But even if it's risks, it will improve the

performance, because risk-adjusted return is actually the

real return you should get from the investment.

Did I answer your question?

COMMITTEE MEMBER MIDDLETON: Very well. Thank

you.


Mr. Miller.

COMMITTEE MEMBER MILLER: Thank you. One of the

things that kind of struck me and it's very refreshing is

this idea of challenging the conventional wisdom that is


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widely held not just by the public, but especially by the

financial services industry, and people in this business.

And it kind of struck me, yesterday, we were talking a

little bit about the new normal when it comes to thinking

about buydowns and recessions that the conventional wisdom

of 30 years ago just doesn't seem to apply.

And the conventional wisdom of, you know, modern

investment management theory from 80 years ago, ideas

about market knowledge, and valuation, and efficient

frontiers, and all this and that, a lot of it doesn't seem

to work anymore.

And when you would talk about the fees, this

concept of, you know, pay and performance seems to leave

out kind of the concept of Deming's Bed Beads experiment,

that you've got this big circle of luck or chance, and

this smaller circle of skill or competence, the minimum --

and this little intersection that you're trying to reward,

and we so often end up rewarding or punishing chance and

basically wasting our money. That whole active/passive

thing.

So my question to you is are there other areas

kind of the conventional wisdom, which often seems to

really serve the interests of the financial services

industry more than us that you see there's a new normal?

That the conventional wisdom just doesn't really work


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anymore and we need to kind of break out of those kind of

mental models or mindsets?

MR. MIZUNO: That's a -- that's a tough question,

because -- to answer, because it's a really good question?

(Laughter.)

MR. MIZUNO: For example, the benchmarking -- the

concept of benchmarking is created because customer didn't

want to pay for luck, right? And also, the asset managers

don't want to be penalized for -- possible for something

out of their control. And the Board's priorities is like

a needs much and it created the conventional system of

active managers evaluated relative to benchmark.

But if you are running a business as a corporate

executive, you cannot tell your shareholders like, you

know, we lost money, because the market shrunk last year.

It's not my fault. They wouldn't accept it, right?

So in real life, the people are evaluated both

for their skills as well as lucks. And, you know, our --

recently, our core research program with the Sony Computer

Science Laboratory, AI came up with what they called

distiller to actually judge when the performance delivered

by active manager, whether it was their intentional

success or luck. And we came to realize some people has

been consistently lucky.

(Laughter.)


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MR. MIZUNO: But, you know, it may change our

perception. Because, you know, we used to think we need

to segregate the luck from the skill. And we only should

back the manager who has skills. But if we realize, some

person has been consistently lucky and being able to

deliver the performance to us, we maybe should pick that

one, right?

So there's a lot of, you know, new perspective we

are bringing to our business. So even for the area of the

asset management of the way we analyze their performance,

I think the conventional wisdom probably being destroyed

or being challenged.

But more broadly to answer your question, I think

we are facing the situation like nobody knows when this

mandatory easing contract, you know, the close --

finishes. You probably don't remember, but it was

Japan -- Bank of Japan who started -- who did the first

quantitative easing in history of mankind. And most of

U.S. prominent economists criticized the Bank of Japan

saying they are some -- doing something really stupid.

But when a demand crisis hit the market,

everybody actually copied what the Bank of Japan did. And

so, you know, that was totally unconventional 20 years

ago. Japan had the guts to experiment it, and now

everybody copied. The problem is nobody has the guts to


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experiment -- experiment how to get out of it.

And I was hopeful Fed will do it, but now is

going into different direction. So we are now operating

in a very, very sort of uncharted like environment, where

every single major -- you know, the central banks printed

tons of money over the last 10 years and nobody knows how

to close that.

And I've been very surprised the market has

been -- not now, but if you remember one year ago,

everybody thought the Fed will be able to maneuver or

navigate the other -- how to exit from quantitative easing

well. I was skeptical, because nobody tried it. First

trial is going to be bumpy all the time.

So I really cannot specifically answer your

question. But there's a lot of things which never

happened in the past, and when we do it for the first

time, it's going to be very bumpy. Yeah.

COMMITTEE MEMBER MILLER: Thank you.

CHIEF INVESTMENT OFFICER MENG: Yeah. That's

something mentioned a couple times your colleagues about

as well, the new normal. So what is the new normal? But

definitely this is the conventional wisdom doesn't work in

today's environment anymore.

As a recent example, a few weeks ago, PIMCO put

out a paper they called the negative nominal interest rate


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will become the new normal. And that's what we talk about

yesterday, I highlighted. That's one of the scenarios we

stress test our portfolio, what if that became reality?

Are we ready for that? And also I talk about how would

capitalism work when capital is free or when capital is --

carry a negative interest rate?

So that is uncharted territory. And if you

extend that line of argument, one of the scenarios could

be when people say, what's the future of Europe? Look at

Japan. What's the future of Europe? What's the future of

us? Look at Europe. That's the future of us, right?

So in Europe now, again, the 30-year German bond

nominal yield is negative already. And Japan's like the

deflation and then disinflation. And Europe and we are in

kind of a disinflation environment. So that can be one of

the potential scenarios in the future.

So back to your question you mentioned the new

normal, the convectional wisdom does -- may not work in

today's market environment. So we all have to very

mindful and keep on -- keep thinking outside the box,

instead of limit ourself to the conventional wisdom. And

that's why dialogue like this is very helpful.

COMMITTEE MEMBER MILLER: Thank you.


Ms. Yee.


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A couple thoughts. One, I need to just add my

thanks to you, Hiro, for your leadership, particularly

through your participation and involvement in Climate

Action 100+, which really I think just brought about the

entire Asian community -- the continent of Asia to the

table, which is so key, in terms of where we need to move.

And perhaps this is a bit of synergy, but I'd

like to think without as much skepticism as I currently

have, but our own business roundtable just yesterday has

also kind of declared a different way of thinking about

how to bring about value, and, you know, made declarations

that generating shareholder value is not going to be their

main objective and understanding now.

And I believe a lot of this is because of the

engagement that we've had with them globally and

understanding that the world is changing around them. But

that value really needs to be about how they value their

employees, their suppliers, the communities in which they

have a presence. And, you know, I think all of this is

just really additive in terms of how we're going to look

at all these issues in the long term, but I think it's

additive with respect to how we're going to sustain our

markets going forward as well.

So I just wanted to make that statement, because


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obviously this is top of mind for just -- not just the

pension funds, but just in terms of how we just kind of do

business in this, you know, kind of commonplace now around

the world. I think there's a lot of thought that's

evolving, which seems to me at least going in the right

direction, similar direction.

MR. MIZUNO: Thank you. I think the --

yesterday's like the Business Roundtable like Jamie

Dimon's like statement about the shareholder's values no

longer the primary purpose of the business, which we

should argue that he should have said like the shareholder

value is not only primary goal of the corporate

businesses, right?

I mean, this is again -- like, it's not going to

be ESG or financial return argument. They should achieve

both. So I think the other -- as we are steward of our

beneficiaries. We need to make it clear they cannot use

it as excuse not to deliver shareholder value, but --

which I think is important.

But I think that's another evidence, you know,

the people like him started thinking differently. And now

they feel the pressure that they need -- it need to serve

the other stakeholder to remain a business.

And one other things we -- that he -- they talked

about was like the pay gap -- gender pay gap or the income


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inequality. That's the S issue. But it's going to create

a lot of social issues. And, you know, we are not safe --

or we are not distant from what's happening in society.

You know, the other -- what your democracy of

United States brought up to the world actually affecting a

lot of our investment, right? So the political decision

affect the performance of our portfolio as well.

So I think that conventionally industry --

investment professional you spend the day looking into

Bloomberg chart. Now, I think we should pay more

attention to what's happening in the world from the broad

perspective, and what happening to the society, how angry

the young people and several, like some working classes is

going to affect our portfolio. It's only affecting.

I was involved in a G20 meeting, and, you know,

the -- some of the sustainability agenda was vetoed by

American -- U.S. federal government. And so there's no

discussion on those topics. And that's actually the

consequence of the other -- your democratic choices.

So, sorry, I have no personal opinion on that.

But, you know, I'm just trying to convey, you know, the

time the investment professional use to spend the whole

day watching the Bloomberg TV screen has ended.


No other requests to speak.


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Anything else, Mr. Meng?

CHIEF INVESTMENT OFFICER MENG: I think just in

conclusion, I really want to thank Hiro for this

thought-provoking talk with the dialogue with you. And I

want to thank him for making this special effort to come

to us. He flew in from Tokyo last night just to give

us -- to talk to us. And then he will be on his way to

London to seek his daughter. So he's really making this a

very special trip for us. So thank you.

CHAIRPERSON FECKNER: We're very honored to have

you be here. Thank you.

(Applause.)

MR. MIZUNO: Well, just to give you my last word,

thanks again for inviting me. It's my honor to present,

you know, the GPIF initiative and also my own thought to

the CalPERS Board.

And as I put in my final slide, I think asset

owner should work together to achieve a lot of things.

And even just the fee for the asset managers, we can work

together and to make our business more sustainable and

more aligned for the benefit of fiduciary.

And thank you very much. We always regard

CalPERS our closest -- the sister or like the partner. So

thank you very much for inviting me today. Thank you.

CHIEF INVESTMENT OFFICER MENG: Thank you.


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CHAIRPERSON FECKNER: Well, it's been our

pleasure and honor to have you here, so thank you.

(Applause.).

CHAIRPERSON FECKNER: With that, we're going to

take a 10-minute break -- make it 11. We'll reconvene at

10:45.

(Off record: 10:34 a.m.)

(Thereupon a recess was taken.)

(On record: 10:45 a.m.)

CHAIRPERSON FECKNER: Can we please take our

seats. We'd like to begin again. We still have quite a

bit on our agenda.

Mr. Meng.

Not yet. Not yet.

There you go.

CHIEF INVESTMENT OFFICER MENG: Thank you, Mr.

Chair. So now we continue the second half of the Board

education program this morning. This is on global

equities. With that, I will turn it over to Dan

Bienvenue, the Managing Investment Director of Global

Equity to introduce our distinguished guest.

INTERIM CHIEF OPERATING INVESTMENT OFFICER

BIENVENUE: Thanks, Ben. Dan Bienvenue, MID of Global

Equity.

This morning, we're moving on to our second asset


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class overview. If you recall, this is part of your

series -- you know, the educational series as part of the

Board workstreams. This is the second asset class we're

covering. We covered fixed income in June, after covering

in May, I believe it was, asset classes, risk and return.

This recall is work in partnership with the CFA Institute

and the Council of Institutional Investors to build this

curriculum over the past couple and the next several

months.

Today, it's my pleasure to introduce John

Griswold who is part of the CFA Institute senior faculty,

and has extensive experience teaching investment programs

to pension fund boards around the country. So he has the

unenviable task of following Hiro. But believe me that

John is here to really walk us through global equity and

take a deep dive. And we are really fortunate to have him

here as well.

(Thereupon an overhead presentation was

Presented as follows.)


BIENVENUE: You have his full bio alongside with his

slides, so I won't repeat what have you there. But

needless to say, John is a highly respected leader in the

field of Board education on investments. We're very

grateful for him making the time also to come out and


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spend time with us and dig into the global equity asset

class.

Once again, we're hoping for a good lively

discussion. We think that, you know, it works better when

it's done that way. So John and I also will be looking

forward to questions and comments as we go through.

And with that, I'll turn it over to Anne to kick

us off.

INVESTMENT DIRECTOR SIMPSON: Thank you very

much, Dan, and Ben, and, of course, John for being here

with us. My job is quite simple. It's just to recap

where we are in this series of board education.

Your recall when the Board went through its

self-evaluation last year, improving education for each of

the committees was one of the findings. And as Dan said,

we are delighted to be working in partnership with the CFA

Institute and with the Council of Institutional Investors.

And we're working our way through the key topics

in investment. And following Hiro, I think has given us a

case study, an example from a sister fund looking at these

issues from a global point of view, we'll be looking at

specific asset classes this morning.

The other thing I want to just recap is what is

the role of the Investment Committee? It's a Committee of

the Board in relation to investments. This is the day job


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of management. It's the role of consultants. But the

Board has a very particular responsibility.

As Dan said, this is workshop number 3, part 2.

We've covered risk and return basics. We then covered

global fixed income. And today, we're going to be looking

at global equity.

--o0o--

INVESTMENT DIRECTOR SIMPSON: So this is our

favorite slide to show, whenever we're talking about

investment. It's the one thing that keeps us all

absolutely focused on the job of generating sustainable

returns for the pension fund. We pay pensions in dollars.

And this is the CalPERS Pension Buck. And it reminds us

that for every dollar for the, as Ben said, more than $20

billion that are paid out every year, $0.59 come from

investments.

So getting it as right as we can, getting as much

luck on our side as well as skill is going to be vitally

important. And the role of the Board in that is critical.

And that's really what this education program is intended

to do, help you fulfill your responsibilities more

effectively.

--o0o--

INVESTMENT DIRECTOR SIMPSON: And so what are

those? So in the formalities of the CalPERS system, of


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course, the Board divides up the job of overseeing the

organization through a series of committees. And the way

these responsibilities are set out is through what's

called a delegation.

And for the Investment Committee, there are

important responsibilities. Conducting strategic asset

allocation. As Hiro said earlier, this is where the vast

majority of returns come from getting those decisions

right. And the Board also has responsibility for

selecting and overseeing performance of the Board

consultants.

So what is the Investment Committee charged with

overseeing? This is really the monitoring function that

the Investment Committee has. Of course, investment

performance, that goes without saying. But also a

component of this is find liquidity; the selection and

performance of partners, managers, and consultants; cost

effectiveness; risk assessment; Environmental, Social, and

Governance Program; and the management of risks.

So the critical word here is oversee. This is

actually work that's done by management. And the role of

the Board is to oversee and hold accountable.

So with that in mind, just as background, let me

now turn over to John who's going to take you through how

to think about global equity and the role that it plays in


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our portfolio.

So, John. Thank you.

--o0o--

MR. GRISWOLD: Thank you, Anne. And thank you

for allowing me to come and talk with you this morning.

As Dan said, I've been doing work in helping investors do

a better job for their institutions for a very long time.

I've worked for -- I've been a trustee of many boards

going back longer than I would care to admit, and on many

of investment committees, when I came early -- early on

fascinated with how the process of governance and of also

managing funds affected the sustainability of the

organizations and really increased their ability to

achieve their missions.

I've worked in the nonprofit arena for most of my

career of investing. I worked for 25 years plus at

Commonfund, which was started by the Ford Foundation in

1971 as a nonprofit investment management company for

endowments in the education field, mostly higher ed

independent schools. We did a lot of research over the

years. We wrote a lot of white papers and even some

books, and did a lot of investor education.

Along the way, of course, meeting a lot of folks

who were leaders in the industry, nonprofit industry,

including pension funds, has been a real education for me.


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That continues. A lot of my friends who have been friends

for many, many years are still engaged in this work and

there is sort of a calling to it. It is hard to follow --

follow a guy like Hiro, because, in fact, he embodies so

much of what is being done today to continue the mission

of these organizations that are vital to the future of

their beneficiaries, whether they be the student health

care patient, a pensioner, or any other charitable

recipient of any service or financial benefit.

So it's a remarkable industry, if you will.

There's some wonderful statistics the Urban Institute puts

out that non-profits actually contribute a bit over 10

percent of the wages and salaries in this country,

accommodate -- it's responsible for over 5 percent of GDP.

The assets are 3 plus trillion dollars at last count,

probably a bit more than that. But Americans give well

over -- almost -- I think over $400 billion to charities

every year. So it's a very large industry. It's a very

large -- it's a large activity providing the safety net in

this country.

So clearly, congratulations to you for the time

you spend, the dedication you show to helping CalPERS do

its part in benefiting its pension -- pension recipients,

its beneficiaries.

Let me start with a few things -- by the way, I'd


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like, with Dan and Ben's permission, to ask that you ask

questions along the way. I started as a teacher actually

in Connecticut right out of college. And I always -- I

learned very early that I wanted to know what the -- what

my audience was thinking. And the only way you do that is

to get them to ask questions. So please ask questions.

We can try to answer them. I've got some extraordinary

depth of knowledge here about CalPERS. I'll try to add a

little overview as Dan and Ben know on the principles

involved in global equity.

Global equity, of course, is the largest single

asset allocation within your policy portfolio.

--o0o--

MR. GRISWOLD: And we might as well go back to

real basics and ask what is equity? Equity is actually a

piece of the corporate financial structure in companies.

It is -- they are -- it is common stock or different kinds

of stock. It could be preferred. It could be warrants.

It could be depository receipts for those foreign

investors.

But it is really issued to raise capital for the

operation of the company, so that they can grow their

business, expand their share.

--o0o--

MR. GRISWOLD: There is -- as I say, there are


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many types of shares, but they do allow the holder to

vote, unlike the holders of debt. Some of you may

remember my colleague from CFA Institute, Jeff Bailey who

was here I think a month ago approximately talking about

fixed income. And we'll make some comparisons between

equity and fixed again to remind you of that.

But, in fact, common stock is one the lowest in

the ranking of the capital structure, but it's a very

important piece, because it raises the most money, in most

cases. Issuing stock is obviously ownership in the

company. You are participating in the growth of the

company, unlike fixed income holders, and you're, by

extension participating in the growth of the economy. As

the company grows, it's part of a growing economy.

And that's true globally. That's why there is

an -- there is an allocation to global equity in most

large institutional funds, because they wish to

participate in the growth of the global economy. And that

has happened over many, many years. There will be some

other slides where I'll talk a little bit more about that.

One of the things that, of course, you get to do

as a common stockholder, other stockholders to some

extent, is to participate in the voting about corporate

issues, corporate concerns.

And that's when it comes to ESG or any other


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issues, compensation - you can think of a lot of them -

there are tremendous opportunities for shareholders to

influence that. And in this country, of course, we've

seen a continual concern. When I work with the CFA

institute, which I think most of you are familiar with.

If your're not, please ask a question about it.

But I am not a CFA charter holder myself. I'm a

member of a committee, which is called the U.S. Advocacy

Advisory Committee, USAAC. And it's one of several

committees around the world that the CFA Institute has

developed and has put in place to pick up issues from the

local countries/regions and bubble them up to the senior

staff and to other important people working with CFA

Institute to do advocacy to the regulatory authorities,

SEC, FINRA, et cetera, Labor Department, and to promote

best practice, and ethical behaviors, and good behaviors

basically for the investment industry and for generally

asset owners as well.

So a lot of the work we do -- we have meetings

and discussions during the year. We meet once a year for

sort of a plenary retreat meeting in Washington. And a

lot of the members, most of them are CFAs, except for me.

I do feel honored to be a part of that. But in fact,

those society -- local society members bring their issues

to the table at those retreat meetings. And then the


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senior staff and other important advocates for changing

some of the regulations, some of the laws, some of the

practices do their work on the Hill or with the SEC. We

have the SEC come in and talk to us about what they're

doing.

And, in fact, I think it's an opportunity for --

as Hiro said in the earlier session, there is an

opportunity to be heard. And particularly if you're a

large asset owner, of course, there is, because people

tend to listen to those. But even as a local CFA person

who is working in a local advisory form, or a bank, any

number of different types of jobs, they could be heard

through the work of the Advocacy Committee. Very

important, I think, for the benefit of the asset

recipients, eventually the beneficiaries.

A lot of the work we do has to do with things --

with issues such as --

INVESTMENT DIRECTOR SIMPSON: I think we should

move on.

MR. GRISWOLD: Move on. Yeah.

Well, a lot of the work we do is talking about

the very things that Hiro was talking about earlier, how

to integrate ESG into portfolios and how to get -- how to

get more value out of the management of funds. And he's a

good -- as I say, he's a good embodiment of some of the


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things that we talk about in that meeting.

Let me move on, as suggested. I get a little

windy sometimes.

--o0o--

MR. GRISWOLD: This is a chart that shows the

U.S. share of GDP. And really what we're talking about

here is the rationale for going global in your equity

allocation. U.S. share in the 80s was over 35 percent.

Now, it's under 25 percent.

What does that suggest?

Well, clearly, if you're only invested in your

home market -- and there's a feature in most portfolios

called home bias. Investors traditionally, going back

many, many decades, have invested traditionally mostly in

their home market, because they felt more comfortable and

they understood the co-market, but also because they were

little -- perhaps a little risk averse, they may have been

a little fearful of going abroad.

And, in fact, up until just the last few decades,

really starting in the 50s and 60s, investing abroad was

difficult. It was much more expensive. And the results

were sometimes uncertain, partly because the regulations

in the company -- in the countries abroad were not clearly

understood, where they averse to investors from outside

their own countries. So that has changed enormously.


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CHIEF INVESTMENT OFFICER MENG: Yeah. I would

like to add one comment here. So in addition to the

percentage of GDP -- global GDP, there's another layer to

it. It is also the -- how deep the capital market is,

because the depths of capital market is not always

correlated -- positively correlated with the GDP share.

So, for example, China's GDP is second largest

economy. But the capital market adapts -- capital market

is not the second deepest in global capital market. So

just -- we always have to keep that in mind.

MR. GRISWOLD: Yes. The U.S. share of the

capital markets actually is 55 percent now approximately.

So our market is very deep. It's very large relative to

any other market in the world. And in a way, you almost

hope that shrinks over time, because, in fact, then you

will -- it will be a by-product of those markets that are

large, now getting large. But perhaps the depth and

breadth of those markets will cause those markets to be

more acceptable to investors around the world, and

including Hiro's fund and, of course, funds across Europe

and others in Asia that are beginning to really grow

enormously, sovereign wealth funds included.

So let's move on here.

--o0o--

MR. GRISWOLD: Global equity allocation is really


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the ability to invest anywhere in the world. It isn't

that you're in your home market and then you add an

international component. A global investor is able to go

anywhere, invest anywhere. And typically, they are broken

down into three components, U.S. investment of course for

a U.S. investors, plus international developed market

stocks, and emerging market stocks.

This is a sort of the three-legged stool of

global investing. And, of course, those categories will

change over time as markets develop, countries become

larger because of their own internal business development,

and the size of their capital markets.

--o0o--

MR. GRISWOLD: This is a chart that was developed

by actually a friend of mine Elroy Dimson when he was at

London Business School with two other academics. And it

was a book that called Triumph of the Optimists. It was

published in 2000. It was a fascinating book.

But basically, the idea was that the optimists

who invested in equities won over investors in other asset

classes, basically over fixed income, or anything, real

estate, what have you. And that was because of the growth

of the economies, the growth of these stock markets, the

growth of the companies they invested in.

And so over a period from 1900 until 2000 when


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the book was published, they looked at I believe it was 19

markets originally. Now, it's, I think, 23. And they

scoured the world for markets where you had a very long

history, a very long data set of equity returns that they

could produce these numbers from.

So this shows you going back in many countries,

most of them developed countries. There's most of Europe

there. Some outside, New Zealand, Canada, and obviously

the United States. But this is 100 now -- almost 120

years of data on how equities have beaten fixed income.

And, in fact, it is a great example of what we're talking

about and why you invest in global equities.

--o0o--

MR. GRISWOLD: So the traditional rationale is

several-fold for investing in this asset class.

Obviously, we all probably know that diversification,

multiple asset classes, low correlations hopefully between

the various asset classes and strategies does provide a

lower portfolio risk overall.

If you think to the traditional rationale for

investing in private equity or private capital generally,

venture capital, other things, is that you're lowering

your portfolio risk, even though you're putting

individually risky asset classes or strategies together.

So global equity is the same thing, but in a


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slightly different way. Diversification regionally,

geographically is really lowering your portfolio risk.

You're capitalizing, as I said, on global economic growth.

You're increasing your breadth of opportunities for the

portfolio manager, including looking for market

inefficiencies. The Holy Grail is to find dislocations

and inefficiencies. That's Ben and his staff's job. And

they are -- they -- that consumes them all the time, where

can we find inefficiencies that we can exploit?

And, of course, you're taking advantage of market

cycles. You can vary your portfolio weights depending on

the region, or the individual country, or even a sector of

the industries that you're looking at from the investment

standpoint.

--o0o--

MR. GRISWOLD: This, on the other hand, shows you

a long-term look at when the U.S. has beaten

international. So if you take the global equity universe,

you break it down between U.S. and non-U.S., this is what

you see over a long period of time. This goes back to the

1970s. It shows you those cycles. And more recently, of

course, the U.S. has outperformed international for the

last 10 years. We heard that from Hiro and from others.

But you've had times when valuation of a

particular -- of like either the U.S. or the international


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got up to a point where it was apparently too high, people

felt there was not much value to be gained in continuing.

So they shifted back to the other group of investment

markets, and, in fact, so you have a swing.

We're wondering right now, because the U.S., by

many measures, is fully valued or even overvalued,

depending on which measure you're looking at. The

cyclical Case-Shiller measure -- index being one, where

the ratio being one measure. A lot of people saying the

U.S. is overvalued versus international, and international

thus is undervalued versus the U.S. So will there be a

shift? We don't know. Nobody has a crystal ball. It's

existed longer than we know.

I was fascinated by Hiro's statement that the end

of last year was the first time in his experience that

everything went down. So perhaps something has changed

and we aren't going to see quite the rational shift that

most of these changes between the U.S. and international

would illustrate. That people see overvalue, they get out

that asset class, and they go into a different one.

Questions on any of this so far? This is fairly

basic stuff, I know. But I think it's good to take a step

back sometimes and look at your allocations and what are

the qualities of what you're looking for. And you as a

Committee, as a Board, as Anne said, have the


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responsibility for monitoring your staff, but also just

asking good questions, tough questions of anybody who's

talking about this.

CHAIRPERSON FECKNER: No requests so -- oh, just

as I say that.

Ms. Yee.

MR. GRISWOLD: You knew that when you said that

CHAIRPERSON FECKNER: Every time.

(Laughter.)


So I wanted to just get your perspective about

whether there may be an opportunity for like this

heightened on emerging markets, given obviously the

volatility that we're seeing with respect to the other

buckets and -- or has it just -- has there just not been

enough progress with respect to, you know, those

countries, and certainly those opportunities with respect

to expecting that we could get outperformance in the near

term?

MR. GRISWOLD: I think as a group, emerging

markets is very varied, first of all --

COMMITTEE MEMBER YEE: Yes.

MR. GRISWOLD: -- so there's no one answer.

Emerging markets contains China, which a lot of

people find quite odd, because China is now the second


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largest economy in the world. Some think it on a

purchasing power probably it's the largest. But, in fact,

it is -- in general, emerging markets have always been

more volatile, partly because they go through a much more,

if you will, dramatic economic cycle. And that affects

their security prices.

They're also subject, in many cases, to the trade

imbalances or trade hiccups that go on. The old

expression, the -- you know, the U.S. sneezes and

everybody gets a cold in the rest of the world, but that's

particularly true -- been true of the emerging markets

that are very dependent on trade, and partly because

they're very dependent on the commodities that they

produce.

They are -- they're smaller markets in many

cases, so they don't have the clout to -- or the

consistency. And many of their markets are very thin from

an equity standpoint.

Ben, do you want to comment further on that? I'm

sure you have some good insight.

CHIEF INVESTMENT OFFICER MENG: Yes. So exactly

like John has said that the definition of emerging markets

is very broad. As John mentioned, China is considered an

emerging market, so is Singapore and South Korea, and then

compared to other emerging market countries. And then in


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emerging market investment, we deal with additional layer

of risks such as the instability of the political system,

regulatory bodies, currency. As you know, the currency

has been very volatile market.

So these we all have to take into account when we

look emerging market investment opportunities in emerging

markets.


BIENVENUE: And I think the only thing that I would add to

that is just that when you look at this cycle of

outperformance, if you put up your international X -- or I

should -- like emerging markets, so international X

emerging markets, the outperformance of the U.S. is even

more pronounced. And largely, that's due to the dollar.



BIENVENUE: Now, the other side of that, and remember that

we're not looking in the rear-view mirror, we're looking

forward and trying to think about our allocation, the

reality is that emerging markets are cheap.

COMMITTEE MEMBER YEE: Yes.


BIENVENUE: Now, are they cheap and getting cheaper from

valuation standpoint? That's -- you know, as John said,

if we had a crystal ball, that would be really helpful,


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but we don't. But it is the case from an valuation

standpoint, their valuations are relatively low and

certainly they are a portion of our benchmark.

COMMITTEE MEMBER YEE: Right.

CHIEF INVESTMENT OFFICER MENG: And also, when we

look at emerging market, we also had to be mindful, some

people can break down emerging markets by commodity,

either importer -- net importer or net exporter, then

the -- or the super commodity cycle plays a bigger role.

For example, Brazil is a commodity exporter.

India and China mainly a commodity importer.

COMMITTEE MEMBER YEE: Importer, right.

CHIEF INVESTMENT OFFICER MENG: So depending on

which part of the commodity -- so commodity is one way.

And overall, are you net importer or exporter. So

emerging markets tend to be net exporter. So they are

exposed to the global economy, the volatility of the

currency, economic -- the commodity cycles, the

instability of the political system. So there's a number

of additional layers we need to consider. And that's why,

as John mentioned, tend to be more volatile than developed

countries.

MR. GRISWOLD: Very often, you're looking at the

risk side rather than the return side, when you're looking

at emerging markets, because the risks, as Ben said, can


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be multi-faceted, much more so than a much more developed

settled market. And so that contributes to the

volatility, because those people -- there's a bit more

emotion in there, if there's any fear -- fear and greed

will work against each more violently. If any worldwide

event happens, like '08, '09, and so you see tremendous

volatility.

Just an anecdote, when we were starting an

emerging markets fund many years ago at the firm I worked

for, we weren't investors that -- while the return over

many -- will volatile, you have to be a long-term

investor, really long term. I'm talking 15, 20 years to

really realize the steady growth of the economic

improvement in those -- in that sector. And indeed, that

has proven to be true.

So you're seeing this tremendous variation in

volatility, standard deviation, or what have you. And,

you know, hopefully it doesn't -- doesn't panic an

investment committee and pull out of that just at the

wrong time. And that's one of the things that we teach

university boards or the longest investors -- longest

horizon investors, use your long-term horizon to your

benefit. And that gives people a little thought --

something to think about particularly.

And pension funds are some of the longest


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invention -- longest years -- your's is a perpetual fund

too. It is a huge advantage when you can ignore the

volatility and the panic of other investors, because you

will -- you could benefit from that occurrence.

Let's move on here quickly. Let me make sure I

State the -- what this is -- what this chart is.

--o0o--

MR. GRISWOLD: It is a U.S. versus international

equity. So if you put them again together, they make the

whole global equity pie. But it shows you the difference

in volatility is these are rolling standard deviations of

monthly returns from 1970 on your far left. That says '74

there, so I'll say it's '74, to the end of 2018.

And what it shows you is the -- that individually

the international and the U.S., the volatility is quite

high. But if you put them together, that's the green

line, that shows you that together it makes my point that

I made earlier, your volatility is actually reduced most

of the time. Not always, but most of the time.

CHAIRPERSON FECKNER: We have another question.

Mr. Jones.


Chair.

Yeah. Back to the general statement about global

equities. And I don't know recall what that number is,


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but over some period of time the number of public

companies where we have access to global equities have

been decreased by some 40 percent as I think I remember a

number.

INVESTMENT DIRECTOR SIMPSON: Yes.

COMMITTEE MEMBER JONES: And so my question is,

is that looking at our long-term philosophy, do you think

that that decrease in number of public companies where we

have access to global equities will continue to decrease,

and if so, what kind of thought you have about new

strategies to deal with the ever-decreasing number of

public companies in the marketplace?

MR. GRISWOLD: It's interesting. I appreciate

your question. I think Anne might be able to shed some

light on that too, because I think you've thought a good

deal about that as well. But let me just say from a --

it's one of the -- it's one of the issues that this U.S.

Advisory Committee that I'm on at the CFA Institute has

been wrestling with.

There are various theories about why that's

occurring and what the ultimate result will be, if you

will, for investors. Clearly, it is disturbing to see

that. But what seems to be happening, at least in the

U.S., which is really more easily seen, but it's probably,

to some extent true, in all developed markets, is that


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companies feel it is more profitable to be private, to go

private, or the -- given the activity of private equity of

taking firms -- taking companies private has produced this

over time.

And, in fact, it has reduced the breadth of the

market. There's no question. The option are not easily

taken on, because you don't want to be regulating

something where you -- there would be lots of unintended

consequences potentially.

So, Anne, what's your thought about that too?

I'm not sure I've answered your question.

INVESTMENT DIRECTOR SIMPSON: Yeah. No. Thank

you very much. It's an excellent question. CalPERS

sits -- I represent CalPERS sitting on the SEC's Investor

Advisory Committee and we had hearings on this topic last

year. It's a global phenomenon. I think that's one thing

to note. And I think there were two lessons that came out

of the hearings. One is that the abundance, the supply of

finance in private markets means that companies don't need

to go to an IPO as soon as they might have done before.

So they're staying private longer and more of their growth

is happening in private markets.

And for many companies going public is a way to

monetize incentives, in other words, options for the

inside team for the management, and also to give an exit


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for the first and second round funders in the private

markets. Because the venture capital and the private

equity industry, they need the public markets, because

they need a place to go. They can have trade sales

through private market deals, but the public markets

really matter for the private markets. So that whole

issue of what are the public markets there for was really

center stage in the discussion.

Another issue was about the rising costs of

listings, which have gone from, you know, modest amounts

to several million dollars. And that's felt to be a

burden. And then there was also --

MR. GRISWOLD: Extra regulation as well.

INVESTMENT DIRECTOR SIMPSON: Well, there was

a --

are --

MR. GRISWOLD: That's part of the cost.

INVESTMENT DIRECTOR SIMPSON: The listing costs

MR. GRISWOLD: Considerable.

INVESTMENT DIRECTOR SIMPSON: -- an item in their

own right. And you'll recall that there was some efforts

to lift the regulatory burden by giving exemptions to, you

know, certain rules and regulations to have a lighter

touch. But that doesn't seem to have been followed by a

surge in IPOs. So there's a real interest in say, okay,


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what's really going on in the wider economy, taking the

United States as the example. So the need for finance is

diminished. The type of industry, there's been a huge

transformation. And that in itself means that financial

capital is playing less of a role in company value.

I'll give you one data point that we were very

struck by. Thirty years ago, the S&P 500, which is, you

know, a very important index on the balance sheet, which

is a way -- one way to value a company, 85 percent was

fixed assets. So fixed assets 30 years ago were really

important. Fixed assets are expensive. You've got

equipment, and land, and inputs, and all the physical

things that could be valued on a balance sheet.

Fast forward to now, 85 percent of the S&P 500

balance sheet is what's called intangible. That means

brand. That means goodwill. That means human capital.

And so one of the projects that's come out of this SEC

work is actually looking at what is the reporting regime

that we need now to start capturing the value that's on

the balance sheet. And that includes the human capital

reporting initiative that CalPERS has played an important

role in.

So I think the question -- I think another thing

that came out at the hearings was a recognition that the

private markets do not have the same regulatory


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requirements, but there is a case -- some argued to the

hearing there is a case that the SEC's remit needs to be

extended further.

And you'll see that in the last round of

regulatory expansion, private equity firms, hedge funds

came under the umbrella of SEC regulation, which is one

step in that direction. But right now, there is, as John

said, a quiet life if you're in the private markets. But

there is also some concern to ensure that private markets

get better regulated, because, you know, a growing part of

the economy is growing that.

MR. GRISWOLD: And just to follow up on your

point about the reluctance or the delay in going through

an IPO process, that may be encouraged by the ease of

getting financing because of the easy money we referred to

earlier when Hiro was here. There's an enormous amount of

money sloshing around the world. And it is -- if you

don't have to go public and you can get financing from

private sources, the question is why would you bother

going public? It exposes you to all kinds of things that

you may not want to deal with.

And, in fact, that could be a serious issue that

might be -- I don't know how you solve that without --

without going through the trauma that we started to go

through last year, that Hiro referred to, and I'm sure


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has, you know, happened, too.

Dan, you had a question -- you had a point too.


BIENVENUE: Yeah. I think it's a terrific question, Mr.

Jones. And the only comments that I would underscore is

that it is a global phenomenon, but it's especially

pronounced in the United States. And I would say less so

developed international, and even less so emerging

markets, where even you're not seeing the level of --

nearly the level of shrinkage. It's also worth mentioning

that there are fewer companies public, but they are larger

companies. So the capitalization of the markets has

actually grown significantly, but it's just concentrated

in fewer companies.

That said, the growth of the private markets

relative to public markets is really where we're talking

about. You know, in some of your -- you know, I think it

was Andrew that mentioned yesterday just how much dry

powder is on the --

INVESTMENT DIRECTOR SIMPSON: Right.


BIENVENUE: -- is on the sidelines around private markets.

This is one of the reasons why we're so focused on finding

a way to deploy more capital into the private markets is

that, you know, historically the Apples, and the Oracles,


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and the Genentechs went public as very small companies.

Now, these companies are staying. And so as an investor,

you could -- as a public markets investor, you've got

exposure to really early growth of those companies.

Much of that growth is now happening while it

stays in the private markets, which again is a rationale

for our desire to really deploy more capital, but in a

thoughtful way in the private markets.

MR. GRISWOLD: All right. Let's move on here.

COMMITTEE MEMBER JONES: So, yeah --

MR. GRISWOLD: Oh, sorry. I'm sorry. Henry,

another question.

COMMITTEE MEMBER JONES: Yeah. No. So the

bottom line is, is that using Ben's analogy is that where

are we on the wave? You know, have we -- are we at the

crest where we -- it's time to get on and start moving

from global equities in a more strategic and advanced way,

or do we kind of wave -- the wave hasn't reached a crest

yet and just kind of stand back and monitor?


BIENVENUE: I think our thought on that really is thinking

more -- first of all more creatively about not thinking so

much on the asset class and thinking more about the

exposure that we're trying to get. So for us, this is a

lot of the work that Ben has been talking about around


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harvesting equity, public-private. It's -- when you think

about the exposure you're trying to get, you're exposing

yourself to earnings growth. You're exposing yourself to

economic growth.

So really, we want to be thinking about equity

and then thinking about if we believe the growth will be

more on the private markets, it's thinking about how we,

you know, position the public markets to kind of be a

liquidity source in some sense, which again is a lot of

Ben's focus around -- around the -- you know, this

liquidity dashboard and really thinking about how we

generate liquidity.

So I think the wave that we're looking at is that

we think there is more to come from a migration of capital

from public to private, and that's why we really want to

position ourselves to -- you know, to get more in private.

CHIEF INVESTMENT OFFICER MENG: Just on that

note, we are privileged CalPERS, because who we are. Our

size and brand, brand name really help us get access to

the top private equity managers. So not everyone equally

shared that privilege as we do.

--o0o--

MR. GRISWOLD: Right. So this chart shows you a

very long -- this is again from Triumph of the Optimists

originally, but the data is updated yearly by Credit


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Suisse, who's their publishing sponsor. But it's an

interesting chart, because it basically shows you the

gross return on equities versus other asset classes.

Bills, bonds, and inflation are the other measures against

the equities.

The equities in the left-hand chart over that

period of 1900 to 2018, I believe, or '17, is, in fact,

9.4 percent. If you look to the right, you see it minus

inflation, and it's actually 6.4 percent.

So it's really quite astonish -- it's a somewhat

sobering chart in my mind. Because, in fact, over very

long periods of time, if you really want to talk to

somebody about being a long-term investor, 120 years isn't

a bad place to look at.

And in fact, in those numbers are some markets

that collapsed and disappeared for periods of time,

including Germany and Japan, of course, during the war,

and other -- in some other markets as well.

But, in fact, there is a huge gap because of

inflation. And inflation is sort of an insidious risk

that you have to take account of in any investment

strategy long term. This chart to me shows you that. So

it's a -- it is somewhat sobering statistic. It goes from

44,000 to 1,500 from -- nominal to real.



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BIENVENUE: John, can I make one more comment?

MR. GRISWOLD: Sure, absolutely.


BIENVENUE: Just go back to slide 9 really quickly. It's

just worth mentioning really quickly.

MR. GRISWOLD: Nine?


BIENVENUE: Yes, please.

And if you --

MR. GRISWOLD: Here you go.


BIENVENUE: John said a couple of times, and I think it's

worth underscoring thinking as a long-term investor, note

that if you look at the United States and the endpoint of

this chart is from 1900 to 2010, so that 2010 endpoint is

after a 30-year bull run in the bond market, right, where

interest rates went from the mid-teens down into the low

single digits, and right after the financial crisis where

the equity market was at low, and still you can see that

with the United States with all the other countries also,

that equities still vastly outperformed bonds.

Now, bonds are a really important part of a

diversified portfolio. Jeff talked about that last week,

but it's also important that we continue to expose ourself

to equity, because that's where -- that's where the larger


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returns can be gained, though, with the volatility.

So I just thought I would mention that even with

that endpoint, thinking like a long-term investor is one

of the real advantages that CalPERS has.

But again, long term is -- here, is 110-year

perspective.

CHIEF INVESTMENT OFFICER MENG: And the challenge

with equity in the long run, if you can stick to it, the

history proves that it does deliver the premium over bond.

The challenge is the volatility and the drawdown

risk. And that's why the Investment Office so focused on

managing the drawdown risk with the next crisis comes, so

that we can continue to benefit from the equity premium --

the return in equity premium.

So this all ties together why, as Dan mentioned,

that we're so fixated on having a plan, liquidity

dashboard, to protect ourselves against from the next

drawdown. In the meantime, we try to explore all the ways

that we can benefit -- we can expose to the equity

exposure, that be public equity or private equity.

--o0o--

MR. GRISWOLD: All good points.

Other questions?

Okay. So this is from your own statement about

global equity. It's worth repeating. The primary role of


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equities is, “Total return oriented and to capture the

equity risk premium, defined as the excess return over

risk-free government bonds, by means of ownership risk in

companies and exposure to corporate earnings growth. The

major driver is appreciation, with some cash yield (growth

and liquidity)”. And that's from your website.

A very good statement. Probably more technical

than most people would understand, because the equity risk

premium is a calculated number that basically looks at

the -- at the advantage of equities over a risk-free rate,

which is usually use -- the one we use is -- normally is

treasury bills, basically, which is considered risk free

because the collapse of the United States would have to

happen before they would -- before they would be not able

to pay it off.

So they, yes, are very low right now, and, in

fact, could go negative at some point I suppose. So then,

you know, the -- but the fact is that there is almost

always a advantage gap, the risk premium that you take to

go into equities. And that's what you're trying to

harvest when you're going into global equities as well.

You're looking for those premia across the globe.

When you're a global investor, you can look at them in the

U.S. and look at them internationally.

But I want to go back to Henry's question,


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looking at global. One of the answers might be why you

stay with it is because you don't know which ones are

going to be moving in and out of the advantageous cycles,

but also you're looking -- it gives you the chance to look

for those premia where they exist.

And you may see different ways of taking

advantage of those available risk premia that occur and

even prevent -- trying to produce better returns through

either leverage or arbitrage strategies. You use

alternative beta in your portfolio to some extent to do

that.

So it's an -- it's an opportunity set that is not

available when you stick with your home market. You want

to stay well positioned to take advantage of opportunities

wherever they occur in the world.

This is a good statement -- as good a statement

as I've seen anywhere actually in the institutional

market.

--o0o--

MR. GRISWOLD: So why? Again, you're looking for

price appreciation, cash yield, dividends. But primarily

it's the capital gain, the price appreciation that you're

really after in most cases in equity.

Risks. Clearly, economic risks, high sensitivity

to global economic growth and also anti-growth. If you


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have '08, '09 again, it was tough to stay with your equity

allocation. And a lot of people didn't, much to their

chagrin later on particularly if they were quote,

"long-term investors".

You clearly have to worry about liquidity. The

portfolio has got to remain highly liquid, particularly

when you're paying out the size of payouts that you do.

So clearly, you've got to figure that out. But that's

also another reason why you have fixed income and other

liquid sources.

CHAIRPERSON FECKNER: I have a question from Ms.

Taylor.

VICE CHAIRPERSON TAYLOR: Yes. Thank you very

much, Mr. Chair. Thank you very much.

When we get to risks, you have high sensitivity

to global economic growth variability. What do you --

what does that entail? Does that entail the global

outlook in terms of geopolitics? Does that include our

ESG sustainable development goals? What does that

include? Is that just a very narrow it's only about

economic growth.

MR. GRISWOLD: No, it does include all of the

above. It -- what affects global economic growth, and

that's happening now, can be any manner of geopolitical

events, and statements, and, you know, this -- the


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tariffs, the trade controversies that we're going through

now are affecting -- are really affecting economic growth

globally. You're seeing growth slow down.

People are worried that if this battle continues

between U.S. and China over that, that it will further

affect growth globally.

So you can't separate that entirely. There are

obvious ones. There are less obvious once. Clearly,

there are industries which are growing, sort of

organically and others that are declining organically for

other -- for reasons that they don't have the economic

reason to be any longer. It's kind of the old buggy whip

argument. And, you know --


MR. GRISWOLD: -- as AI takes over, you know,

information sources are going to change and the generation

of information will change.

It's extraordinary, you see that actually in the

investment business. That business is changing because

big data comes in, AI machine learning are applied to that

data, and the decisions made by the portfolio managers are

made in a different manner than they were 20 years ago.

It is changing. It's changing the environment.

VICE CHAIRPERSON TAYLOR: So in --

MR. GRISWOLD: And the skill sets that you're


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looking for in your new employees are different than the

skill sets you were looking for even 10 or 15 years ago.

VICE CHAIRPERSON TAYLOR: And so then consider

that in the financial market. And I noticed -- it was

spoken before in our previous class with AI and everybody

taking account of this, and I don't know that our job as

pension investors is particularly -- but we need to be

concerned about this gig economy kicking up, AI replacing

workers. What -- or displacing workers. What are we --

are we helping the capital markets face this, you know,

though our own investments or are we sort of sitting by

and watching it happen, and hoping the capital markets

take account of our possibly very soon displaced workers

that -- you know, in consumer America that makes up a lot

of what our GDP is, so...

MR. GRISWOLD: Well, all I can tell you is I do a

lot of work with universities. They're facing the same

question, because they're seeing a demographic drift --

drip in their student population now. And they're saying

how can we -- how can we train and educate the next

generation of students to become part of the workforce?

That is a big question, and it's a very good

question. No one has a clear answer to it yet. A lot of

optimists are saying, even with the growth of robotics,

AI, machine learning, et cetera, there will be plenty of


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jobs, because --

VICE CHAIRPERSON TAYLOR: I'm not sure about

that.

MR. GRISWOLD: But the jobs will be different.

VICE CHAIRPERSON TAYLOR: Yeah.

MR. GRISWOLD: I mean kids now are being trained

by universities in code -- coding.

VICE CHAIRPERSON TAYLOR: Yeah, but not everybody

can be a coder.

MR. GRISWOLD: Not everybody can be a coder.

That's right. But there will always be need for

communication, for clear thought, common sense, all those

good things that liberal arts teaches you.

And I speak to a lot of university boards and do

some consulting with them. And that's always an

interesting question to get into is how is that university

or how is that college or school adapting to the new

realities, and how do they incorporate that into their

curriculum? You know, there's no easy answer.

VICE CHAIRPERSON TAYLOR: It just seems to me

that it is something we need to be forward-thinking on --

MR. GRISWOLD: I agree.

VICE CHAIRPERSON TAYLOR: -- as an institutional

investor that does invest in the entire index. I think

it's very important that we -- we find out a way that we


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can help folks look at this. I don't know. I think it's

really important.


BIENVENUE: Can I -- I'll just make a -- I think it's a

great point. I'll make a couple of comments.

First to your most recent question and then also

to your previous one, because they're both great

questions. With regard to AI, Beth and her team -- and

she did a collective process around the Investment Office,

but she did a whole project recently. One of the two main

research projects she did in this most recent fiscal year

was on disruptive technology, and AI was certainly a

portion of that.

So it is something we're spending a lot of time

thinking about. There aren't clear answers. But it is

something that is -- that is critical and it will have an

impact.

On your previous questions around economic

growth, this is one of the reasons why we spend so much

time on thinking about the economy and having John

Rothfield here and otherwise. When you think about

equities, ultimately the way that equities make money is

off of earnings. And earnings, right -- I mean, an

equity, as John said earlier, is a pro rata ownership in a

company. Earnings are what drives the value of that


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ownership, right, that company's ability to earn money.



BIENVENUE: Those earnings are based on economic growth.

So this is all these things that you're talking about,

whether people have money to spend, what -- you know,

consumers, whether -- whether there are new productivity

things, things that drive the economy, and all of these

things, whether it's ESG and otherwise.

And I couldn't agree more with what Hiro was

saying earlier that this is why for us ESG is an important

factor. We look at it through the lens of an investor.

It's about how is it going to drive earnings growth and

otherwise. But it will result in impacts on our

investment return, and that's why we need to be thoughtful

in this space.

VICE CHAIRPERSON TAYLOR: Thank you.

--o0o--

MR. GRISWOLD: So let's take a quick look at your

total fund allocation. You can see global equities 50.2

percent. Fixed income on the left, 28.7 percent. Private

equity 7.2. So, in effect, equity -- and you have real

assets, 11 percent. So a good portion of that you could

consider equity, but it may be both. So, in fact, you are

heavily allocated to the equity side of the fence. And


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that's really what you see in most large institutional

investment portfolios. Because they have been trained to

look for the opportunities for growth. And you need to do

that if you're going to keep the contribution of the

investment fund to the income you need to -- liquidity et

cetera that you need to pay your beneficiaries.

CHIEF INVESTMENT OFFICER MENG: Yeah. I'll add

one comment to it. You often hear the term 60/40. So our

portfolio refers to 60 percent equity, 40 percent fixed

income. So if you look at our portfolio allocation now,

it's not that different from 60/40. So we have global

equity -- if you put global equity and private equity

together, it's close to 60 percent of equity exposure.

And if you think of our real assets, our objective mandate

of the Real Assets Program is core -- U.S. core.

So that acts similar to a fixed income. So if

you add our fixed income and real asset allocation plus

liquidity together, it's about 40 percent. So our

portfolio is quite similar to 60/40 that what you often

here in the media and in the context in our conversation

with other peers.

MR. GRISWOLD: Right.

--o0o--

MR. GRISWOLD: So the global investment -- global

equity investment philosophy of CalPERS is really a --


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they are very difficult to predict. We talked about

that. The alpha opportunities are multi-faceted and time

varying. They do change, so you have to be very nimble.

If you're going to invest globally, particularly in

emerging markets where you are -- you do see more

volatility and more cyclical shifts.

But you can take advantage of that as well.

There is -- there is a good portion of the job of global

allocation, of global equity investing, which is looking

for opportunities in terms of cyclical changes which

occur. Focus finally on holistic portfolio net of costs.

I just mentioned 80 percent of the portfolio invest in

costs-efficient internally-managed strategies.

Now, I'll let Ben and Dan talk a little bit about

that, why that's the case.

CHIEF INVESTMENT OFFICER MENG: Yeah. So I leave

the cost to Dan. But I'd actually like to comment a

little bit on the alpha opportunities. So if you look at

the four major asset class we invest in, global equity,

global fixed income, private -- excuse me -- private

equity and the real assets, one can argue the most

efficient market is global equity.

So the alpha opportunity -- in the most efficient

market, the alpha opportunity I would say not just time

varying is, you know, being -- to a certain extent is


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illusive. So capturing the alpha in the most efficient

market segment is very challenging.

So instead, we focus on what -- at least our plan

in the most efficient market -- markets, we tried to focus

on the -- controlling the risk with tracking error and

then reducing operation cost. So it's -- on the cost

part, I will leave it to Dan.


BIENVENUE: Yeah. So this speaks to Ms. Olivares question

previously around some of the questions on fees. For an

organization that's largely externally managed, that cost

structure is more difficult. As we said, you know, with

80 percent internal managed, it gives us a real advantage.

And the whole global equity portfolio runs at about 8

basis points. And that's been on a downward trend from

maybe mid-teens. Actually, maybe in the 20s when I got

here to down to -- you know, into the mid-teens, and now,

as I say, into 8. And I think we're on the path to -- I

don't want to set myself up. But my goal would be in the

next few years to be down into the -- into the mid to low

single digits for global equity.

And that's -- and that's what we've -- that's

what we've seen from a standpoint of our trajectory,

because, I mean, Investment Belief 8, which is one of our

ten Investment Beliefs, we know that the opportunity for


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alpha, and markets will bounce around, but costs are

always a headwind. They're always negative, and so we

manage those very closely.

MR. GRISWOLD: And you've been very successful

from what I've heard and seen -- or read and seen in your

literature that -- in being able to reduce those costs.

In general, by the way, the investment business, because

of the growth of passive investment, index-based

investment, whether it be index funds or ETFs are highly

cost-efficient vehicles. Those have been aided by the

bull market we've been in for 10 years. No question.

And investors are saying why should I pay 30, 40,

50 basis points or more for active investment when, in

fact, they've been losing to passive investments.

They're really talking about equities because

that's the most efficient market. In fact, though, that

trend has been affecting everything in the investment

business. It's been shrinking the business to some

extent, because you -- it is no longer -- on long-only

strategies like U.S. equities, no longer a viable business

to be an active manager unless you're -- you've got some

edge. You've got some distinctive way of making money so

that you're attracting new business.

CHIEF INVESTMENT OFFICER MENG: So on the note

the cost, I just would like to compliment our Investment


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Office. Close to 80 percent of our assets are managed

internally. And we have been running one of the most

efficient asset management from that perspective, cost

efficient.

As Dan said, the Global Equity Program is only

about 8 bps. And we are still -- we're not stopping

there. We're still finding ways to reduce that cost. And

in real assets, Paul Mouchakkaa can tell you, we're trying

to bring -- changing -- we have changed our business model

for better control and lower cost. And then again, the

innovative ways we're trying to explore -- explore in

private equity the Pillar 3 and Pillar 4. One of the

goals is to reduce cost, and more transparency, and reduce

cost.

So we're very proud of the efficiency the

Investment Office is operating now, but we continue to

look for other ways to reduce cost.


BIENVENUE: Yeah. And I'm sorry. Ben, I'm really glad

you mentioned that, not to just single out global equity,

because it is the case that some of the -- you that have

been on the board for a while remember that our cost

structure was north of 1 and half -- you know, approaching

$2 billion dollars years ago. Now, we're down in the sort

of $1 billion range on total fees. And again, that's on


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an AUM that's much higher. Part of that is this focus on

costs.

The fixed income portfolio is over 90 percent

internal managed. And I think that runs at -- you know,

Arnie will have an update next month, but it's -- it's

lower than global equity. I think it's down in the sort

of 5 basis point range. Private equity has done a ton of

work this. Real assets, like Paul -- you know, Ben

mentioned, you know, we're a lower cost than our peers and

what the benchmark computes. So lots of work on cost.

It's been a critical focus across the asset classes.

MR. GRISWOLD: Yeah. I think the private markets

are an area where you'll see -- as Hiro said, you'll see

more work being done with innovation to get those fees

down, so that you're aligning the manager -- the GP's

interests with the -- with the investors, with the asset

owners more and more.

That may be -- we may be seeing the last of the

sort of the great halcyon days of private equity in some

respects. But they're still -- still able to make a lot

of money staying shoulder to shoulder and resisting a lot

of the changes that have been proposed.

CHAIRPERSON FECKNER: A quick question from Ms.

Olivares.

COMMITTEE MEMBER OLIVARES: Thank you, Mr. Chair.


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So as we talk about the basis points that are

paid out to manage some of these funds - 8 bps is

relatively know - when I think of how we would apply that

fee externally -- so if I was to go buy an index for the

S&P 500 and pay 8 bps, that covers all of their

operational expenses, right?

CHIEF INVESTMENT OFFICER MENG: (Nods head.)

COMMITTEE MEMBER OLIVARES: So if we say that our

cost is about 8 bps, does that cover operational and

investment expenses as well, like personal costs, real

estate, everything?


BIENVENUE: Yes. So there's a whole cost allocation

structure. But we get a set of costs that -- from the

enterprise that includes the -- you know, all the work of

the rest of the enterprise. Then there's the cost of our

own fees, which we do have some active management that

includes fees. We also have some sort of model provision

strategies, where we're actually managing against a

factor, but we do pay for that sort of factor provision.

And then also our own headcount and everything else,

technology, all of the above. So, yes, that 8 basis

points is a fully loaded number.

COMMITTEE MEMBER OLIVARES: Great. Thank you.

I'd love to get more information on that.


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BIENVENUE: We'll have more next month with the global

equity program review and happy to -- happy to dig in as

you -- as you see fit.


CHAIRPERSON FECKNER: Go ahead.

--o0o--

MR. GRISWOLD: Did I miss a space?

No. Okay. No, we're -- I think we're good.

This is just some of the -- we threw in some

charts that are more sobering than others. But, in fact,

you have -- over a long period of time here, you've seen

the U.S. clearly outperform non-U.S. stocks. It doesn't

diminish the fact that the diversification benefit and the

ability to find inefficient markets outside of the U.S. is

very valuable to the global investor. But you have had a

long period where the U.S. has outperformed.

That has obviously benefited some people more

than others. But, in fact, you could -- as you do see

there, you do see periods where international stocks do

better, or at least relatively. And then you -- this, of

course, is looking -- looking back in the past. So you

don't know what the future is going to hold. But clearly,

you have benefited from being in this market where the

economic growth has been extraordinary and the equity


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returns have been extraordinary as well over a long period

of time.

--o0o--

MR. GRISWOLD: The other side of that is that you

do have more correlation between the two, you know, U.S.

and international markets. This chart shows you that.

This is the top -- the blue line is the U.S. versus

non-U.S. stocks. The red line is U.S. stocks versus U.S.

bonds. So there's a lot less correlation. I go back to

Dan's point, Ben's point that the -- that's why you have

fixed income, because there is that lack of correlation

that you want to count on, particularly when things get

rough like they did in '08, '09 when the bonds literally

saved a lot of people's bacon and provided the liquidity

they needed to get through that.

I can remember Harvard University having to go

out into the public debt markets to be able to pay their

staff during that period. It was very painful, because

they were subject to capital calls with their enormous

percentage of I private equity and venture capital. And

they were really squeezed. There were in a liquidity

squeeze.

So good to have fixed income, good to have

liquidity in different vehicles that you can count on if

you do get into problems. But this shows you the change


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that's quite dramatic in both cases of the correlations.

Okay. Did you have a point there?

Okay.

--o0o--

MR. GRISWOLD: So let's talk about benchmarks

briefly. I think Hiro covered benchmarks extraordinarily

well in his remarks, so I'm not going to delve too deeply.

But clearly, you heard this from Jeff Bailey a month ago.

He talked about the types of things that you want to see

in a benchmark.

--o0o--

MR. GRISWOLD: You use a benchmark which is a

customized benchmark from FTSE Russell. And I'll let Ben

and Dan talk about any details here -- in detail, if you

have questions on it.

But fundamentally, these -- these characteristics

of benchmarks should be present. They are -- everybody

has to be understanding of what the benchmark is. And in

principle, I just want to talk about that. We can talk a

little bit about -- by the way, that list of

characteristics is in the Primer for Trustees that you all

received - and if you didn't we'll make sure you do - from

the CFA Institute library. It's published by CFA

Institute Foundation.

But it's a terrific book for trustees of


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institutional funds. But all of these characteristics

should be present in an index that you choose -- benchmark

you choose.

--o0o--

MR. GRISWOLD: The custom benchmark, Ben or Dan,

do you have any comments on this or are there any

questions on this? You've seen this before, so I don't

want to dwell on it too long.

But, in fact, you've got a customized benchmark.

Benchmarks are developed by really three primary

producers, MSCI, FTSE Russell, and -- what's the third I'm

thinking of? Not Bloomberg, but they have one too now.

There's another large -- I'll think of it in a minute.

I'm having a brain freeze.

INVESTMENT DIRECTOR SIMPSON: FTSE Russell

combined. Maybe that's what --

MR. GRISWOLD: No, there's actually a third one,

but I have to think of it.


BIENVENUE: Are you talking about the old S&P IC?

MR. GRISWOLD: Yeah. Yeah S&P. Thank you.

I think the interesting thing here is the size of

the United States allocation, if you will, in the

benchmark reflects its capital -- world capital market

share.


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And, in fact, if you'd looked at this, and I

think you can, on the FTSE Russell website, they have a

PAR chart of the original FTSE all-world. It was called

something different then in 1987. And in that one, U.S.

was 27 percent not 54 percent. And guess which market was

35 percent in 1987?

Japan.

And those of you who remember the automobile

industry in the late eighties being taken over by

Japanese, Toyotas and Datsuns, and Suzukis and so forth,

they were ascendant at that time. But this does change.

And, of course, the benchmark that you use to judge

whether you're succeeding or failing versus a previous

regime has to be thought of in terms of the economic

shifts that are going on around the world.

These numbers change and your benchmark has to

change. And it's -- you want to make sure that you, as a

Committee, are looking at the right benchmark.

CHIEF INVESTMENT OFFICER MENG: So just on the

left chart, back to your earlier point John I made, the

United States percent of global GDP is about 25 percent.

But the percent of the market cap share is 54 percent.

And China is the second largest economy called --

depending on which measure you use. Some are between 15

to 20 percent of global GDP. It does not even command its


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own category on this capital market. So that just shows

the share we invest in capital market. And when we look

at benchmark, we have to mindful both of the GDP, the

economic growth and other depths -- the depths of the

capital market.

MR. GRISWOLD: That's true.


BIENVENUE: The one other thing I would add to that is

also demographics, which is another important point. And,

you know, we referred to it earlier.

MR. GRISWOLD: Yeah, we've got one chart on that,

but I'll comment on it, a little bit, but that's

absolutely right.


BIENVENUE: It just -- it's another lens.

MR. GRISWOLD: Right. But if you -- if you're

interested in China itself, then -- and vis-à-vis this

chart, there was an article in the journal I think

yesterday on China opening up its markets through the A

shares primarily, which have been around for a long time

for foreign investors.

But clearly, you have to be very aware of how to

do due diligence in China versus other markets, because

there's a whole layer of different control from obviously

a political and economic standpoint than really almost any


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other market that you're looking at, certainly any other

large market.

And it's astonishing that you don't see -- I was

going to make a comment on that, but thank you, Ben.

Astonishing you don't see China in that capital market

list. But that's the fact today and you probably will see

it soon, I would imagine.

--o0o--

MR. GRISWOLD: So looking ahead. We've just sort

of summarized some of the -- some of the things that we've

been talking about. We are seeing changes in the world

economy, which are going to change the opportunities and

the challenges in global equity investing. You're seeing

slowing growth in the world's economies now for a lot of

reasons. We talked about some of them.

Flatter lower returns for global equities, that

has been predicted for some time. In fact, the U.S. has

been a surprise in how good our returns have been on

average. Yes, you've had bumps like last year. But

overall, this bull market is now the longest expansion in

our history. And, in fact, can continue now as far as we

know, but with clearly increasing risks in certain areas

that you have to be aware of.

And we refer -- Hiro referred to it earlier. One

of the big ones is how long can they central banks


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continue this easy money rate suppression policy that

we've been living under for 10 years now? And what is the

ultimate risk of trying to normalize interest rates,

discount rates in the world economic and monetary system?

There are probably unintended consequences that

we still haven't seen out of that whole regime. The

future inflation interest rates are uncertain. We don't

have a way of predicting those particularly well, even

though the central banks can forecast or can hint as to

what their policies are going to do. You still don't know

where exactly those are going to go.

Central bank intervention may distort cyclical

market cycles. It already has. It is certainly affected

a lot of consumer rates and commercial rates of borrowing

and lending that are both stimulative, but also a little

scary, because you -- there is a shadow banking

unregulated pool of funds floating around that can be --

can be really opportunistic for companies to borrow or

individuals, but also can be somewhat scary because you're

not share whether those are going to be withdrawn at any

point or what the lenders will do if there is some sort of

a break in the markets.

Increasing geopolitical tensions. Clearly, we've

seen that in the headlines. They may impact returns,

obviously due to trade threat and tariffs. And, of


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course, Dan mentioned demographic shifts.

--o0o--

MR. GRISWOLD: Let me just show you one chart

that's a demographic chart. This shows you a projection

out to 2100 of the demographics of the U.S. workforce.

And, in fact, you're going to see a steady increase, slow

but steady increase, protected for that by experts in the

U.S. government, basically. It's the Population

Division -- Population Projection Division.

If you looked at most of the major developed

countries in the world, Japan, most of Europe, China too,

you see that line from 2000 say 20 begin to go down in

varying amounts very rapidly.

So the aging -- and Hiro talked about that

extensively, so I won't go into it in detail. But when

you see that around the world in the developed markets, it

is a little alarming. Because, in fact, the birth rates

in those markets are dropped -- they've dropped to the

point where they're not replacing the workforce. These

are ages -- by the way, workforce is defined as age 20 to

64.

So in many countries that are -- where the

biggest economic activity is going on, their demographics

are not favorable to continuing long term to maintaining

their workforces. It's a major concern on a long-term


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basis. And as long-term investors, I think it's one of

the issues -- one of the risks that you have to take into

account, where are you seeing those shifts more rapid --

occur more rapidly than you were anticipating, or where

can you take advantage of that?

It was interesting. I went to a conference in

Tokyo a years ago. And one of the presentations was by a

professor who had developed exoskeleton. I don't know if

you know what an exoskeleton is. But if you think of a

beetle, a beetle has an exoskeleton. It's an external

shell. In this case, it was a motorized very

sophisticated piece of equipment that an individual could

put on. And it was almost like the Avengers. You could

do a lot of things that you couldn't do. It had

extraordinary, et cetera, because you had these little

motors helping you move, and picking things up, and so

forth.

He developed that in anticipation of Japan's

demographic projection, because it would allow older

workers to work. Now, that's extraordinary. But it's a

good small little example of what the innovation to try to

deal with the aging population Japan might look like or

anywhere else for that matter.

CHAIRPERSON FECKNER: We have a question from Mr.

Jones.


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Chair.

Yeah. Going back to your comment about shadow

banking. Is that prevalent in the U.S.? I understood

that to be a problem in foreign countries. But is that a

major issue in the U.S.?

MR. GRISWOLD: I don't think so, but it's

certainly -- based on the number of emails all of us get

from lending institutions we've never heard of before,

there's a lot of lending going on outside of banks. And

we all know the trouble banks have been through coming out

of the 08-09 period. I don't want to be alarmist, but in

fact there is a lot of money being lent by off-radar

institutions and private individuals.

A lot of the funding of start-up companies done

by angel investors now are very small private syndicates.

And I think that -- I don't know the size of that, because

it's not measured. But, in fact, there is a lot of money.

We know that, because the central banks have been printing

it for a long time. And where is it going?


BIENVENUE: Yeah. The only -- the only thing I would add

is that it's a -- there's a -- there's a definitional

question there how you define shadow banking, right?

I will say that a lot of the risk we think has


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come out since the financial crisis, where so much more

regulation came into place around, you know, lending and

things like that.

But depending on how define shadow banking, you

can include even like hedge funds and things like that.

MR. GRISWOLD: Dodd-Frank covered a lot of those

areas clearly. And, you know, so it -- as I say, I don't

want to be alarmist at all. But, in fact, there are --

it's one of those things that you think about and you

don't really know how to quantify, so it's difficult to

tell. But there are -- there's evidence of lending going

on and borrowing, and how much leverage is in the mix that

we can't measure. And so you can't -- what you can't

measure, you can't regulate. Don't know. But, in fact,

don't want to end on a down note, because we are out of

time.

INVESTMENT DIRECTOR SIMPSON: Oh, well, you can

end with the glossary.

MR. GRISWOLD: Oh, the glossary.

(Laughter.)

MR. GRISWOLD: Yeah, actually --

INVESTMENT DIRECTOR SIMPSON: Knowledge is power.

MR. GRISWOLD: I don't think we need to go

through it page by page.

INVESTMENT DIRECTOR SIMPSON: Not, but I though


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you could have a nice cheerful slide up for your final

remarks.

All of the mumbo jumbo that goes into talking

about investment, we decided it was time to start breaking

it down. We made this promise in another governance

workstream to put things into plain english. So we've had

a first crack at the back of this presentation. And you

can tell us where we've got it right and where we've got

it wrong.

But it's part of a new practice. We want to

start explaining everything. And if we can't explain it,

we shouldn't have it on a slide. So that's -- that was

the thinking --

MR. GRISWOLD: Um-hmm, that's true.

INVESTMENT DIRECTOR SIMPSON: -- behind having a

glossary.

MR. GRISWOLD: Yeah. One of the jobs that I had

at the Commonfund was to try to make the complex simple

and explicit in plain english. I was actually an english

major in college. And how I ended up in the investment

businesses was quite -- was another story. But, in fact,

Peter Bernstein was one of my heroes in this business was

also an english major. I find out -- I found out. We

were talking at lunch one day.

CHIEF INVESTMENT OFFICER MENG: So he's the


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author of the book When Genuius Failed, so -- and he's

author for a number of books. But I think the most famous

one is When Genius Failed.

MR. GRISWOLD: The Story of Risk.

CHIEF INVESTMENT OFFICER MENG: The Story of Risk

and When Genius Failed.

MR. GRISWOLD: Capital Ideas, a whole bunch of

books. There are a number of people that I think define

great thinkers in this business. I may be sitting next to

one or two here. But, in fact, Charlie Ellis who wrote --

I don't know if any of you ever read any of his books, but

me wrote the famous book called Winning the Loser's Game.

And, in fact, it talks about -- Charlie is one of

my good friends, but he drives me a little crazy, because

he ran the investment committee at Yale University for 17

years.

CHIEF INVESTMENT OFFICER MENG: You know you're

on record on YouTube, right?

MR. GRISWOLD: I know. Yes, I do.

INVESTMENT DIRECTOR SIMPSON: He's been to speak

to the Board.

MR. GRISWOLD: He has been -- he's been -- he is

one of -- he's one of the great figures in investing, and,

in fact, has talked about indexing probably ahead of

anyone else in this country, and for all the good reasons


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you're hearing now, but he was doing this 10 years ago,

more.

But he ran the -- he ran one of the most

successful active management groups, which was the Yale

Investment Office as head of their committee for many,

many years, more than 15 years. I think it was 17 years.

And during that period, you know, was the top -- I think

the top institutional investor globally for a long time.

But he is fan of indexing, which just shows you

the change in how the environment in investing has changed

over that period. But Charlie was one of the people who

was predicting it in his book, Winning the Looser's Game

was -- which has come out in various editions, was

predicting that or talking about that. It was based on a

tennis game, playing defense.

I think we've -- I think we've exhausted

everybody, but...

INVESTMENT DIRECTOR SIMPSON: It might be time

for some questions.


BIENVENUE: Are there further questions, Mr. Chair?

CHAIRPERSON FECKNER: There are no questions

right now, no.


BIENVENUE: Okay. Then I think we can conclude it there.


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But definitely, John, thank you very much for joining us.

CHAIRPERSON FECKNER: All right. Thank you very

much for being here.


BIENVENUE: Thank you for your time.

(Applause.)

CHAIRPERSON FECKNER: We appreciate that.

Anything else, Mr. Meng?

CHIEF INVESTMENT OFFICER MENG: No. No.

CHAIRPERSON FECKNER: All right. We do have one

request to speak from the audience, Dave Elder, but I

notice he's not in the room.

Here he comes.

Hurry on down, Mr. Elder. It's your turn.

It's your turn, Mr. Elder. We have your handout

already, by the way. Please identify yourself for the

record and you'll have up to three minutes to make your

comments.

CHAIRPERSON FECKNER: They're on.

MR. ELDER: Good afternoon, everyone.

CHAIRPERSON FECKNER: Good afternoon.

MR. ELDER: My name is Dave Elder. I'm a former

State Assemblyman. I served 10 years as the Chairman of

the PERS Committee. I carried legislation setting up the

prefunding account for health benefits. And I carried a


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number of the bills, 2 percent at 55 retirement formula,

and 2.5 at 55 for correctional officers, so I had about

200 bills signed.

I served as Chairman of the PERS Committee for

larger than anybody in history. And I'm just saying this

because there are a lot of new faces here for me. And I

don't have any speech to make or anything. I just wanted

to bring your attention to this. It's been handed to you.

Harry Markopolos prepared this report. It's 165

pages. This is simply a summary. And I would have

provided the whole thing, but it would have cost me about

$300 to have it copied, so I didn't do that.

But in any event, I just wanted to bring it to

your attention. I think if you have your professional

Investment staff look at it, and analyze it, and then

maybe you want to put it on the agenda for a future

meeting -- in the near future, I would suggest, because

G.E. went down in your portfolio by almost $7 million

today.

And so, at some point, that turns out to be some

real money. In any event, I just would suggest that

perhaps this would be a good thing for your staff to

analyze and be aware of. And I just think if you -- you

might want to get off the railroad tracks before this

thing hits, because he's talking about the possibility of


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bankruptcy with respect to G.E.

And you have a lot of the bonds. Although I

couldn't figure out how much you have in bonds. I know

it's a lot, because it's pretty much gilded high-grade

corporate, so you probably have a lot of it. But that

will all -- and it's probably -- when you bought it, it

was somewhere above par. And it may not be there now. I

couldn't find any quotations on recent quotes on G.E.

debt. Although, there are pages and pages of -- or

columns and columns of them in the financial things like

Barrons. I just didn't happen to have a copy of it to

review where they are in relation to par.

So I just wanted to just make you aware of this,

you know. At least, you know, if anybody asked you about

it, the press or whatever, you can see yeah, we're well

aware of it, we're analyzing it, and we're keeping an eye

on it.

And that's basically all you can do. You might

want to invite Mr. Markopolos to come out here and defend

his report, which I would be -- hell of a public service,

because I think in person -- and he's the fellow who outed

Madoff. And he wrote a book No One Would Listen. You may

have heard of that book. And it took him -- and Harvey

Pitt who -- he referred all this stuff to Harvey Pitt who

was one of the critics of his report saying, you know, he


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could have come to me. Well, it took four years the last

time, so maybe we don't want to do it again.

That's all I got. I'd be happy to respond to

questions if you have any, but thank you.

CHAIRPERSON FECKNER: No questions, but we thank

you for the information and staff will look at it. So

thank you.

MR. ELDER: All right. Thank you.

CHAIRPERSON FECKNER: So before we close, I just

wanted to thank staff for bringing some great speakers to

us today for our educational workshop. Very good time.

Well spent. And thank you all very much and thank both

speakers for some great information.

This meeting is going to adjourn.

(Thereupon California Public Employees'

Retirement System, Investment Committee

meeting open session adjourned at 12:12 p.m.)


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C E R T I F I C A T E OF R E P O R T E R

I, JAMES F. PETERS, a Certified Shorthand

Reporter of the State of California, do hereby certify:

That I am a disinterested person herein; that the

foregoing California Public Employees' Retirement System,

Board of Administration, Investment Committee open session

meeting was reported in shorthand by me, James F. Peters,

a Certified Shorthand Reporter of the State of California,

and was thereafter transcribed, under my direction, by

computer-assisted transcription;

I further certify that I am not of counsel or

attorney for any of the parties to said meeting nor in any

way interested in the outcome of said meeting.

IN WITNESS WHEREOF, I have hereunto set my hand

this 24th day of August, 2019.

JAMES F. PETERS, CSR

Certified Shorthand Reporter

License No. 10063


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